10 Things Everyone Must Know About Reverse Mortgages

If you ever come across the term “reverse mortgage” you might’ve been confused as to how different it is from a normal mortgage. While this type of loan is reserved to seniors, everyone should have a general idea regarding the pros and cons of having reverse mortgage so they can plan their financial future accordingly. Below are 10 things that anyone at any stage of their lives should know about reverse mortgages:

1. Reverse mortgage is a type of loan that lets seniors convert a portion of their accumulated home equity into cash. This type of loan started as a way to assist retired seniors who had limited income to cover their monthly living costs and health care expenses. Contrary to traditional mortgages, the lender is the one who is paying to the borrow, hence the name “reverse mortgage.” The borrower does not have to make any monthly payments to the loan balance until the home gets sold or vacated.

2. You must be 62+ years old, either own your home or have a low mortgage balance, and live in the property to qualify. Because this program is designed to assist elders, younger homeowners do not qualify. However, seniors who meet the age criteria, but have a high mortgage balance don’t qualify either. To get a reverse mortgage, their current loan balance should be low enough that it can be paid off with proceeds from the reverse mortgage.

3. The loan needs to get repaid when the borrower dies, vacates the property or sells it. When you are in a reverse mortgage plan, the amount of money you owe never exceeds the value of your property, regardless of how much you borrow. There are cases when the amount you owe is lower than how much your home is worth at the time of repayment. In this scenario, you or your family gets to keep the difference.

4. Usually, single-family houses or 2+ unit homes are eligible for the reverse mortgage. It’s important to look into the requirements that the U.S. Department of Housing and Urban Development (HUD) imposes and see if your property meets the criteria.

5. For couples, lenders look at the youngest age of the spouse to determine their eligibility. Generally speaking, the older you are and the more value your property has, the more amount of money you’ll receive. But in the case of couples, lenders take into account the youngest age of either spouse.

6. Unlike home equity loans, reverse mortgage doesn’t have any principal and interest payments BUT there are other payments you must make. If you take out a home equity loan, you must make monthly payments for the principal and interest. Reverse mortgage works differently – you don’t have any monthly payments to make. However, you do have to pay real estate taxes, utilities and insurance premiums.

7. The amount of loan you can get depends on your age (or spouse’s), the value of your property, interest rate, and lesser of appraised value. Depending on these three factors, your bank or lender will calculate the amount of reverse mortgage you’re eligible.

8. For some people, reverse mortgages can pay off existing loans and improve their monthly income. Again, this depends on many factors including how low their mortgage balance was when they started taking out reverse mortgage and how much equity they’ve accumulated over the year. If you’ve built a good amount of equity and paid off most of your loans, a reverse mortgage is ideal to meet your financial needs and even get rid off existing debts.

9. If nobody occupies the property for more than a year, the loan comes due. This is a downside to reverse mortgage. If you pass away and the property remains vacated for over a year, the loan comes due. In cases like this, the estate or you have to choice to repay the loan or sell the house.

10. Every homeowner who wants to take out a reverse mortgage is required to get mandatory counseling from a third party approved by the Department of Housing and Urban Development (HUD). Usually, these types of counseling are free – what you should avoid is using an estate planning service that charges a fee. Search online for any of the HUD-approved agencies to get your free session.

Always weigh advantages and disadvantages of reverse mortgages before proceeding to get one. While receiving payments from your lender sounds too good to be true, remember that there are other costs that come along with it.

Sources

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/rmtopten
http://www.reversemortgage.org/About
http://www.bankrate.com/finance/retirement/basics-of-reverse-mortgages-1.aspx