February 25th, 2020 12:05 PM by Jackie A. Graves, President
mortgage is a type of loan where the homeowner withdraws a portion of their
equity but don’t have to repay the loan until they leave the house. One of the most popular types is the Home Equity
Conversion Mortgage (HECM), which is insured by the U.S. federal government.
Although widely available, HECM products are only offered by FHA-approved
mortgages can be a solution for consumers ages 62 and older who own their homes
outright — or at least have a considerable amount of equity to draw from.
be wondering why anyone would want to borrow against a home they worked hard to
pay off. Why not remain in your home and live there debt-free?
to Steve Irwin, executive vice president of the National Reverse Mortgage
Lenders Association (NRMLA), nobody gets up in the morning and thinks about a
reverse mortgage and whether they should get one.
they think how they are going to pay for health care, fix the roof, pay the
property taxes or have enough money to outlive their retirement,” he says. “A
reverse mortgage provides solutions to these issues and many others, so that
people can live more financially secure lives as they age.”
Who is eligible for a reverse mortgage?
primary homeowner must be age 62 or older to apply. However, Irwin says that if
one spouse is under 62, you may still be able to get a reverse mortgage if you meet other eligibility criteria. For example:
How does a reverse mortgage work?
homeowners may not be able to borrow the full value of their home — even if
it’s paid off. The amount you can
borrow (also called the principal limit) varies based on the
age of the youngest borrower or eligible non-borrowing spouse, prevailing interest rates, the HECM FHA
mortgage limit ($726,525 as of February 2020), and your home’s value.
the older you are, the lower the interest rates and the more your property is
worth, the more likely you’ll receive a higher principal limit. This amount can
increase each month because borrowers with variable-rate HECMs may be able to
receive additional funds.
the borrower will never owe more than the home is worth regardless of how much
they borrow or what happens to their property value over time. The borrower or
heirs keep the difference if the reverse mortgage’s balance is less than the
home’s value at the time of repayment.
believe a reverse mortgage is the solution for you, applying for one is similar
to that of a traditional home equity loan. Once you meet the eligibility
criteria, shop around to find the best deal.
lender will assess your financial situation including evaluating your credit
history, any outstanding mortgage and ensuring your property qualifies (as in
you don’t have any active property liens). You’ll also need to provide proof
that you’re able to pay for ongoing housing costs, and order a property
appraisal to determine its value and how much you can borrow.
close on your loan, you have the right of rescission, or your right to cancel
your mortgage without penalty. In order to do so, you need to notify your
lender within three business days after closing in writing.
to keep all copies of any correspondence and send your letter via certified
mail and ask for a return receipt so that you’ll know it got into the right
hands. Afterwards, your lender will have 20 days to return any fees you’ve paid
for the reverse mortgage.
What are the types of reverse mortgages?
you know how a reverse mortgage works, you’ll want to consider which type will
best suit your needs.
Reverse mortgages — what are the pros and cons?
against your home equity to free up cash for living expenses is an option if
you need the money. However, there are advantages and disadvantages with this
type of mortgage.
the main details to keep in mind:
How much does a reverse mortgage cost?
of higher costs, it’s important to understand that closing costs for reverse
mortgages tend to be significant. Most HECM mortgages let you finance closing
costs into the new loan, however, meaning you won’t have to fork over the money
breakdown of HECM fees and
charges, according to HUD:
Mortgage Insurance Premium (MIP). You’ll pay a 2
percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent
of the outstanding loan balance. MIP can be financed into the loan.
Origination fee. Lenders charge the greater of $2,500 or 2 percent of the
first $200,000 of your home’s value to process your HECM loan, plus 1 percent
of the amount over $200,000. The FHA caps HECM origination fees at $6,000.
Servicing fee. Lenders can charge a monthly fee to maintain and monitor
your HECM for the life of the loan. Monthly servicing fees cannot exceed $30
for loans with a fixed rate or an annually adjusting rate, or $35 if the
interest rate adjusts monthly.
Third-party charges. Third parties charge their own
fees for closing costs, such as the appraisal, title search and insurance,
inspections, recording fees and mortgage taxes.
in mind that the interest rate for reverse mortgages tends to be higher than
that of a traditional home equity loan. Of course, rates can vary depending on
your lender, your home value, your creditworthiness, market fluctuations and
Reverse mortgages vs. home equity loans
not yet 62 or older but still want to tap into your home equity, you may want
to consider a home equity loan or home equity line of credit (HELOC)
instead. Both loan products will let you borrow against the equity you have in
your home, although you can typically only borrow up to 15 to 20 percent
of your home’s equity.
it’s important to understand the differences you’ll find with a home equity
difference between a reverse mortgage, a home equity loan, and a HELOC is that
the homeowner doesn’t need to make monthly payments with a reverse mortgage,”
said Irwin. Plus, any funds borrowed from the reverse mortgage don’t need to be
repaid until the borrower passes away or permanently vacates the property.
home equity loan or HELOC, the borrower does have to make monthly
payments until the loan is paid off. Home equity loans can also be more
difficult — or impossible — unless retirees have sufficient income to repay the
flip side, home equity loans and HELOCs don’t require you to be at least
62 years old to apply. Fees and interest rates for both can also be significantly
lower than what you’ll qualify find with a reverse mortgage.
How to shop around for a reverse mortgage
good idea to speak with a HUD-approved counselor before shopping around for
reverse mortgages. That way, you get to learn the ins and outs of what this
type of loan entails and provide relevant information to ensure you make an
shopping around, decide which type of reverse mortgage you want based on your
financial needs. Once you get a few quotes, compare offers based on loan terms
and fees. Mortgage insurance premiums are typically the same between lenders
but other costs can vary greatly — including interest rates, closing costs,
origination fees and service fees.
How to avoid scams related to reverse mortgages
way to avoid them is to be aware of potential scams. If you don’t understand
what you’re getting into — especially the cost and terms of one — don’t sign on
the dotted line. This is especially important if you’re feeling pressure to do
so. Instead, do more research or find a company that you trust.
Alternatives to reverse mortgages
not convinced of any of the reverse mortgage solutions mentioned above, here
are some alternatives:
The bottom line
wants to have to borrow money just to get by, but reverse mortgages do serve an
important purpose. For the most part, they are intended to generate income to
help consumers cover living expenses without having to move in old age. For
those struggling to pay for healthcare, food or experiences as they enjoy their
golden years, a reverse mortgage can be a game-changer.
again, they’re not for everyone. A reverse mortgage isn’t a good option if you
can’t keep up with the costs associated with the home, even without a monthly
die or the home is no longer the primary residence for more than 12 months, the
loan comes due, which means either you or your estate has to repay the loan or
put the home up for sale to settle it.
potential drawback: if the loan balance exceeds the home’s value, you or your
heirs may need to sign a deed-in-lieu of foreclosure and give the house to the
interested in taking out a HECM-type reverse mortgage must also receive mandatory
counseling with an independent agency approved by the U.S. Department of
Housing and Urban Development (HUD). Typically, counseling is free or available
at a reduced cost.
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