March 16th, 2018 8:39 AM by Jackie A. Graves, President
reverse mortgage is a type of home equity loan that’s reserved for older
homeowners and does not require monthly mortgage payments. Instead, the loan is
repaid after the borrower moves out or dies.
mortgages are often considered a last-resort source of income, but they have
become a great retirement planning tool for many homeowners.
first federally-insured reverse mortgage — also known as a home equity
conversion mortgage, or HECM — was introduced in 1989. These loans allow people
who are 62 or older to tap a portion of their home equity without having to
are a lot of motivations leading into it,” Bell says. “In some cases, people
may have an immediate need to pay off debt, or they may have had some
unexpected expenses like a home repair or health care situation.”
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be eligible for a reverse mortgage, you must either own your home outright or
have a low mortgage balance that can be paid off at the closing with proceeds
from the reverse loan.
must also use the home as your primary residence.
A change in federal rules that
took effect in October 2017 tightened the amounts that can be borrowed. But
generally, the older you are and the more valuable your home, the more money
you can get.
are no restrictions for how the money from a reverse mortgage loan must be
method of payment collection depends on the type of mortgage. Retirees with an
adjustable-rate mortgage can collect their payments on a reverse mortgage as a
lump sum, fixed monthly payment, line of credit or some combination.
of fixed-rate mortgages receive a lump sum.
reverse mortgage wouldn’t be the best option if you can’t keep up with
maintenance and the other costs associated with the home, even without a
monthly mortgage payment.
you die or the home is no longer the primary residence for more than 12 months,
the loan comes due, which means either you or the estate has the option to
repay the loan or put the home up for sale to settle it.
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interested in taking out a reverse mortgage are required to receive mandatory
(free) counseling by an independent third party, including an agency approved
by the Department of Housing and Urban Development or a national counseling
agency such as AARP. These organizations help homeowners review alternative
you get older, it gets harder to grasp some of the terms in these kinds of
transactions, so it’s not a bad idea to have someone younger who you trust,
like an adult child, involved in the process,” says Phillip Cook,
CFP professional in Manhattan Beach, California.
you decide to proceed with the loan, you can expect to pay higher-than-average
closing costs based on the value of your
home, including origination fees,
upfront mortgage insurance and appraisal fees.
interest rate you pay is also generally higher than that for a traditional
in mind that anyone who takes out a reverse mortgage remains responsible for
paying property taxes, insurance and repairs on their home. If you fail to
comply, you may be required to repay your reverse mortgage early.
the equity in your home, of course, also diminishes the value of your estate —
leaving you less to pass along to your heirs down the road.
explore all other sources of income first before tapping into your home
equity,” advises Cook. “Liquidate your portfolio and cut down on your living
expenses. If you still don’t have enough, a reverse mortgage may make sense.”
locate a Federal Housing Authority-approved lender or HUD-approved counseling
agency, you can visit HUD’s online locator or
call the department’s Housing Counseling Line at (800) 569-4287.
National Reverse Mortgage Lenders Association also maintains a database.
of applying for a reverse mortgage? First, check your credit report at myBankrate.
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