A reverse home mortgage is not for everyone, but it can be the ideal solution for senior citizens who need money to cover repairs to the house or other expenses. Before taking out a reverse mortgage, you should understand what it is, how it works and what the risks are.
Using Equity
Traditionally, the only way you could access the equity in your home was to take out another mortgage. The funds would be deposited in your account and you would make regular payments to the lien holder. A reverse mortgage is similar in that it allows you to access the valuable equity in your home. However, unlike a regular mortgage, the loan does not have to be paid back until after you are no longer using the home. You will not have to make any payments towards the loan. The total cost of the loan will be taken out of the equity in the house once you are no longer living there.
Types of Mortgages
There are a few different options available for you. The first is a single-purpose reverse mortgage and is offered by some state agencies and nonprofit groups. These are typically seen in connection with programs that help elderly homeowners make necessary repairs or upgrades. They are the easiest to get, but they are also extremely limited as to size, availability and what the funds can be used for.
Federally-insured reverse mortgages are backed by the U.S. Department of Housing and Urban Development. These HUD loans are referred to as Home Equity Conversion Mortgages, or HECMs. A more expensive loan to take, they are widely available and there are no income or medical requirements. They can also be used for any purpose.
The final type of reverse mortgage is the proprietary reverse mortgage offered by private lenders. Very similar in nature to the HECM loans, these are backed by private bankers and institutions.
Requirements
Requirements may vary from one lender to the next, but most banks closely match the qualifications laid forth in the FHA HECM reverse mortgage program. Under this system, homeowners must be age 62 or older and either own the home completely or have a low mortgage balance. The homeowners must reside in the home. The structure must be a single family home or a multi-family home with between two and four units. The homeowner must live in one of the units if this option is chosen. Certain condominiums are acceptable as well as some manufactured housing. The borrowers cannot have any federal debt delinquencies, suspensions, debarments or other exclusions from FHA programs if they want to take a FHA reverse mortgage.
Counseling
If you go through the FHA for the loan, you will be required to attend counseling sessions. These sessions will outline the financial implications of taking a loan, borrower obligations, alternatives, what the costs involved will be and the repayment conditions.
Other Payments
The mortgage payment will not be required, but lenders will require that you make other payments. Real estate taxes and insurance premiums must be kept current. Any utilities will have to be paid for by the homeowner, as well. The home must also be maintained in the same condition it was in when the loan was received. It cannot be allowed to fall into disrepair over the years.
The Heirs
Once the home is no longer the primary residence for the borrower, the outstanding mortgage balance will have to be repaid. Most estates accomplish this by having the house liquidated and using the proceeds to pay the mortgage. The lender will then collect the principal balance, any interest fees and finance charges that are owed. If there is money left over after this process, those funds will be turned over to the estate and the heirs. No debt will be attached to the estate or passed to the heirs.
Available Funds
The maximum mortgage limit through HECM FHA is $625,500. How much of this a person is eligible for will depend largely on the size of the home and its value. The age of the borrowers will be taken into account with younger borrowers seeing higher interest rates. The lender will also look at the value of your home and current interest rates.
Costs
As with any mortgage, there are fees associated with reverse mortgages. You can expect the final repayment of your loan to include origination fees, servicing fees and interest. There will also be traditional third party fees for the appraisal, inspection, lender title policy and other activities.
Receiving Payment
There are five different payment plans to choose from with a reverse mortgage. A tenure plan will provide you with equal monthly payments for as long as a borrower is still residing in the house. A similar option is the term plan, in which the payments are made for a set period of time. A line of credit will allow borrowers to customize a payment plan, or simply pull money as needed.
Changing your Mind
Taking out a reverse mortgage is a major decision. By law, you have three calendar days after closing to cancel the loan. Referred to as the Right of Rescission, you will receive more information regarding this at closing. It is recommended that you ask for written instructions about the rescission process since the exact procedure will differ from one lender to another.
Shop Around
Just as with any mortgage, it’s important to shop around before choosing a reverse mortgage provider. The individual terms of the loans will vary from one lender to the next. You may be able to find a better deal, more favorable terms or simply a larger loan by checking with other lenders. Take the time to do your research. If necessary, have a trusted family member or friend assist you with this process. Don’t be swayed by high pressure sales pitches and be wary of reverse mortgages that pressure you to buy other products. Reverse mortgages are readily available and it’s important to find the right one for your needs.
A reverse mortgage can help you make your home handicapped accessible. You can get the supplies you need to stay in your home longer, or simply take the funds you want to actually enjoy your retirement. Before making a final decision, sit down and review all the information and offers you have received. With a little research, you can find a reverse mortgage that will be the perfect solution to your financial dilemma.