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A reverse mortgage uses the equity in your home to give you a regular monthly income for housing and living expenses. Learn everything you need to know about choosing the best reverse mortgage program.
We have all seen commercials about reverse mortgages, promising a solution to all financial problems for older homeowners. However, reverse mortgages are not suitable in all situations. We will take a closer look at what reverse mortgages are, as well as the advantages and the disadvantages to help you decide whether this method of financing expenses is right for you.
A reverse mortgage is a type of loan that uses the accumulated equity in a home as collateral for the loan. It is designed for older homeowners who have limited income but have equity in their homes. The homeowner can use the equity to borrow money to pay for expenses without having to repay the borrowed amount through monthly payments. Reverse mortgages can be helpful when people have unexpected medical expenses, need additional money for everyday expenses or have other special expense needs.
The most common type of reverse mortgage, the Home Equity Conversion Mortgage, was created by the Federal Housing Administration (FHA) in the late 1980s after the first congressional hearing about reverse mortgages in 1983 and the first pilot program for reverse mortgages in 1987.
In a typical mortgage, the interest on the loan is paid off through part of your monthly payments. In a reverse mortgage the interest is due and payable at the mortgage's maturity date. The owner will continue to pay homeowners insurance and property taxes as usual.
Although there are a variety of different reverse mortgages available for different needs, they all follow the same fundamental principles.
To qualify for a reverse mortgage, the applicant must fit the following criteria:
Age 62 or older
Own the property outright or have enough home equity to cover the loan
Occupy the property as a primary residence
Not be delinquent on any federal debt
Have financial ability to continue paying property expenses, such as taxes, insurance, association dues, etc.
Must attend a consumer information session given by a HUD- approved HECM counselor
For FHA approved reverse mortgage loans, only certain types of housing will qualify:
Apartments of 2-4 units, as long as you live in one of the units
Certain Housing & Urban Development condominiums can quality
Certain manufactured homes that meet FHA requirements can qualify
The money you can borrow will depend on the following:
Your specific financial requirements
Age of the youngest co-borrower living in the home, if applicable
Appraised value of the property
Mortgage insurance premiums required
Lesser of appraised value or the HECM FHA mortgage limit of $625,500
Payments from a reverse mortgage are usually structured using one of several payment plans:
The homeowner receives equal monthly payments for a fixed number of months.
The homeowner receives monthly payments of equal amounts as long as one of the borrowers are alive and residing in the property as a principal residence.
Line of Credit
The Homeowner receives installments or unscheduled payments in amounts of the homeowners choosing and at the times they prefer until the equity line is exhausted.
Combines line of credit and scheduled monthly payments for as long as the person stays in the home.
Combines line of credit and monthly payments for a fixed number of months.
Single Lump Sum Disbursement
The Homeowner receives a single lump sum at closing.
To get a better understanding of the details and total cost of your reverse mortgage loan over the life of your mortgage, use the Besmartee Reverse Mortgage Amortization Calculator.
The mortgage must be paid off at the time of the homeowners' death. Otherwise, the lender assumes the property and will sell it on the homeowners' behalf. Any proceeds beyond the loan amount will go to the surviving spouse or children. Any debt remaining does not get passed to the estate or the heirs.
Homeowners interested in reverse mortgage should investigate the costs involved, such as:
Mortgage Insurance Premiums
Must be paid upfront and on an ongoing basis
Third Party Charges
Can include an appraisal, title insurance, surveys, inspections, recording fees, taxes, credit report fees, etc.
The reverse mortgage lender can charge up to $6,000, depending on the value of your home.
Lenders can charge up to $35 per month to service your loan, which may include sending you account statements, check disbursements and making sure you property taxes are up to date.
Homeowners should compare the interest rate and terms of several different companies before making a final decision. For many homeowners, this is likely to be the very last home loan they assume on their property, which is why it is so important to take your time and not rush into this decision.
Picking the right reverse mortgage program will give you the peace of mind and security you deserve in the later years of your life. It is wise to seek help from HUD and the FHA through their counseling services to help you make the best decision.
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