What Are The Risks Of Using A Home Equity Loan To Buy Another House
The major risk of a home equity loan, as with a regular mortgage, is that it is secured by your home. This means that if you are unable to keep up with the payments, your lender could seize the home, sell it, and evict you. Instead of a home equity loan, you also may be eligible for an unsecured personal loan, which wont put your house at risk, although it typically will have a higher interest rate.
Would You Benefit From One
A reverse mortgage might sound a lot like a home equity loan or line of credit. Indeed, similar to one of these loans, a reverse mortgage can provide a lump sum or a line of credit that you can access as needed based on how much of your home youve paid off and your homes market value. But unlike a home equity loan or line of credit, you dont need to have an income or good credit to qualify, and you wont make any loan payments while you occupy the home as your primary residence.
A reverse mortgage is the only way to access home equity without selling the home for seniors who dont want the responsibility of making a monthly loan payment or who cant qualify for a home equity loan or refinance because of limited cash flow or poor credit.
If you dont qualify for any of these loans, what options remain for using home equity to fund your retirement? You could sell and downsize, or you could sell your home to your children or grandchildren to keep it in the family, perhaps even becoming their renter if you want to continue living in the home.
Why Would Companies Want To Buy A Reverse Mortgaged House
There are what we call real estate investors who are in the business of buying and selling homes. Theyre the ones people call when they want to avoid the headaches and costs of dealing with realtors, homebuyers, and the tons of documents that need to be processed.
These real estate investors are buyers of homes with an impending foreclosure, hard-to-repair damages, and other less-than-ideal conditions.
This is the answer to how to sell my house with a reverse mortgage. These companies buy a reverse mortgaged house and resell or rent it out whatever they decide to do with it. You, the seller, just have to sit back and relax.
Let the real estate investors do all the homework and paperwork for you. Wake up to a brand new start without the burden of a reverse mortgaged house holding you down.
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Execs And Cons Of Utilizing A Residence Fairness Mortgage To Purchase One Other Home
The most important benefit of utilizing a house fairness mortgage to purchase a second house is that it could be your greatest vital supply of funding if you end up house-rich however cash-poor. One other potential plus is that rates of interest on house fairness loans usually will probably be decrease than different types of borrowing, although theyre sometimes larger than rates of interest on a mortgage.
The largest draw back of utilizing a house fairness mortgage for getting one other propertyor for another objectiveis that youre placing your main residence in danger, as a result of it serves as collateral to secure the the mortgage. If you end up unable make the funds on your property fairness mortgage, the lender might foreclose on your property and evict you.
An extra hazard is that by taking over a house fairness mortgage, particularly for those who nonetheless owe cash in your first mortgage, you may end up overwhelmed by debt for those who face an surprising monetary reversal, resembling a job loss or massive medical payments. Certainly, you may wind up obligated to repay three mortgages without delay: the rest of the mortgage in your main residence, a mortgage in your second home , and your property fairness mortgage.
Reverse Mortgage: Pros And Cons
Like anything, there are benefits and drawbacks to a reverse mortgage.
- Being able to borrow from equity can ease the financial constraints of limited retirement income
- Home prices typically appreciate, which means there may still be money left to distribute beyond the balance of the reverse mortgage loan once the loan matures
- A reverse mortgage comes with closing fees and other costs – the origination fee can be as high as $6,000, depending on the homes value
- Unlike with a traditional mortgage, failing to pay taxes or homeowner fees can result in foreclosure
- You will no longer have your home as a source of future equity. If you need to move and purchase a smaller home, the transition might be difficult as funds have already been sapped
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Will A Reverse Mortgage Affect My Social Security Or Medicare Benefits
Reverse mortgage loan proceeds are non-taxable monies. The proceeds do not affect Social Security or Medicare benefits in most cases. To be safest, most borrowers utilize the new reverse mortgage credit line feature instead of payments sent to them to avoid any income restrictions. It is advised to seek professional income advice from a CPA or tax accountant for further details.
Hecm For Purchase When Relocating
One popular reason a senior might consider a reverse mortgage purchase is for relocation. Perhaps he or she is experiencing a decline in health and wants to move closer to their loved ones. In the event that family members are able to help care for them, they might be able to postpone moving into an assisted living center or eliminate the need for a caretaker, which could help save expenses. In other cases, the senior homeowner might want to relocate to warmer weather and enjoy their retirement outdoors in the sunshine. Using a reverse mortgage to buy a new home in a different geographic area may be an attractive way to turn relocation into a viable possibility.
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Pay Off Your Reverse Mortgage
A common question borrowers have is, Can reverse mortgages be repaid? The answer is, yes, paying off your loan is one way to avoid potential reverse mortgage nightmares if things are heading in the wrong direction.
A borrower who wishes to repay their reverse mortgage loan may do so without penalty at any time, said Irwin. They are only responsible for repaying the balance of the loan, which is the amount borrowed plus interest.
Figuring out how to pay back a reverse mortgage could be complicated. Borrowers would typically need to access their own funds or seek another form of financing to cover the accrued interest.
Can I Buy A House With A Reverse Mortgage
Many senior homebuyers are turning to reverse mortgages as a financing tool to purchase new property. This may seem a little unusual at first because of the general misunderstanding of reverse mortgages but its true, you can buy a house with a reverse mortgage. The process is exactly the same as if you were to purchase a home with a traditional or forward mortgage. Escrow is opened, the buyer submits a down payment and the mortgage completes the sale.
The buyer is now the new owner and holds title to the property. And because its a reverse mortgage, the buyer never has to make a single monthly payment as long as they live in the house or condo. That is how a reverse mortgage works.
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Reverse Mortgage Borrowing Limits
If you get a proprietary reverse mortgage, there are no set limits on how much you can borrow. All limits and restrictions are set by individual lenders.
However, when using a government-backed reverse mortgage program, homeowners are prohibited from borrowing up to their homes appraised value or the FHA maximum claim amount . Instead, borrowers can only borrow a portion of their propertys value. Part of the propertys value is used to collateralize loan expenses, and lenders also typically insist on a buffer in case property values decline. Borrowing limits also adjust based on the borrowers age and credit and also the loans interest rate.
Be Wary Of Sales Pitches For A Reverse Mortgage
Is a reverse mortgage right for you? Only you can decide what works for your situation. A counselor from an independent government-approved housing counseling agency can help. But a salesperson isnt likely to be the best guide for what works for you. This is especially true if he or she acts like a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you can spend the money from a reverse mortgage.
For example, some sellers may try to sell you things like home improvement services but then suggest a reverse mortgage as an easy way to pay for them. If you decide you need home improvements, and you think a reverse mortgage is the way to pay for them, shop around before deciding on a particular seller. Your home improvement costs include not only the price of the work being done but also the costs and fees youll pay to get the reverse mortgage.
Some reverse mortgage salespeople might suggest ways to invest the money from your reverse mortgage even pressuring you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage. You dont have to buy any financial products, services or investment to get a reverse mortgage. In fact, in some situations, its illegal to require you to buy other products to get a reverse mortgage.
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Buying A Vacation Home
However, the new rules haven’t eliminated one of the more unusual uses for a reverse mortgage and that’s to buy a new home entirely. For example, it’s possible to use the proceeds from a reverse mortgage to buy a vacation property or second home, as there are no restrictions on how you use the funds. In another twist, in some cases you can even use a reverse mortgage to buy a new primary residence and not have to make monthly mortgage payments. Here are a couple example of how they work.
Clients of Sean McGeehan, a mortgage loan officer in Homer Glen, Ill., cashed out about $200,000 with a reverse mortgage on their home in Illinois that they owned free and clear so they could pay cash for a vacation home in the Cayman Islands, McGeehan says.
The couple, in their early 70s, had been vacationing there for 10 years and always wanted to buy a home there, figuring it was cheaper than renting for a month or so every year, he says. Also, financing a home purchase in the Cayman Islands is difficult if the buyer doesn’t live there, so getting a traditional mortgage was out of the question, he says.
“They just wanted to be able to use their money now and enjoy it, and not let it sit in their house” McGeehan says.
Most people use reverse mortgages to help pay living expenses because they’re broke, McGeehan says. Another popular use is for long-term care insurance.
First Home Buyer: Do You Have The Financial Resources To Buy A House
There are three key questions you should ask yourself when youre a first time home buyer
If you can answer all three questions with yes, it may be time to consider homeownership.
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What Is The Hecm For Purchase Program
The HECM for Purchase Program makes it easy for retirees to purchase a new primary home. It streamlines the home-buying and selling processes by consolidating them into a single transaction. And it saves seniors money by reducing their cost of living. Those who downsize can use their leftover cash for other purposes.
If you qualify for an HECM for Purchase Loan, you wont have to pay a monthly mortgage bill. In fact, you wont have to pay back your loan until you move out or die. And since its a non-recourse loan thats backed by the FHA, you wont have to pay back more than the value of the home .
If Your Home Is Worth Less Than You Owe
Of course, with the swings in the housing market, it is also possible that your home will now be worth less than the original loan amount. Reverse mortgages are non-recourse loans, which means that the lender cant sue you for the difference. You will owe them the loan balance or 95% of your homes appraised value, whichever is less.
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Deferring The Reverse Mortgage
Seniors in a position to pay all-cash can defer the reverse mortgage decision. If they elect to take one in the future, they will be older and their house will be worth more, both of which increase the amounts they can draw under a reverse mortgage. Working in the opposite direction, however, is a likely rise in interest rates from the unusually low levels that have prevailed in recent years. Higher rates reduce the amounts seniors can draw under a reverse mortgage.
I took a hard look at this issue in an article I wrote last year —Should I Take Out a Reverse Mortgage Now, or Wait? I found that if interest rates are stable, the credit line available to a senior of 62 who waits 10 years before taking out the reverse mortgage was only 17% higher, whereas a doubling of interest rates during the period would reduce the available line by 69%. For seniors looking to strengthen their finances in the future, waiting is a risky strategy.
Spouses And Partners Have Both Rights And Obligations
When you and your spouse are co-borrowers on a reverse mortgage, neither of you have to pay back the mortgage until you both move out or both die. Even if one spouse moves to a long-term care facility, the reverse mortgage doesnt have to be repaid until the second spouse moves out or dies.
Because HECMs and other reverse mortgages dont require repayment until both borrowers die or move out, the Consumer Financial Protection Bureau recommends that both spouses and long-term partners be co-borrowers on reverse mortgages.
If your spouse is not a co-borrower on your reverse mortgage, then they may have to repay the loan as soon as you move or die. As for whether they can remain in your home without repaying, that depends on the timing of the HECM and the timing of your marriage.
If a reverse mortgage borrower took out an HECM before August 4, 2014, then a non-borrowing spouse does not have a guaranteed right to stay in the house. Instead, a non-borrowing spouse will either have to move out of the house or pay off the reverse mortgage within six months of receiving notice from the lender.
The rules are different for HECM loans that were issued after August 4, 2014. With these loans, an eligible, non-borrowing spouse can stay in the home after the borrowing spouse moves out or dies, but only if they meet these criteria:
If youre an eligible non-borrowing spouse, the reverse mortgage will not need to be paid until you die or move out of the house.
S For Selling A House With A Reverse Mortgage
The process of selling a home with a reverse mortgage is similar to selling a home in general, with a few differences. Here is a typical breakdown of what the process may entail:
- Contact your reverse mortgage lender and confirm how much you owe on your loan, which would include any money you have received to date, the interest charged, and any other lender fees. Verify if there are any additional fees. Obtain the full payoff quote in writing.
- You can find a real estate agent to help you with the sales process, although this is not required.
- List your home for sale.
- You could choose to utilize the services of a real estate attorney in order to ensure that the full payment of your reverse mortgage is handled correctly.
- Once your home is sold, ensure that the reverse mortgage loan is paid in full from proceeds and that your reverse mortgage account is closed. You may keep the remaining amount.
Once a borrower is aware of the few differences to take into account, they will be armed with the knowledge to sell their reverse mortgaged home in a similar manner as they would have done with any other home with a mortgage.
What To Ask A Lender About Reverse Mortgages
Before getting a reverse mortgage, ask your lender about:
- how you can get the money from a reverse mortgage
- if there are any fees you have to pay
- what interest rate you have to pay on the money you borrow
- what can cause you to default on the loan
- any penalties you have to pay if you sell your home within a certain period of time
- how much time you have to pay off the loans balance if you move
- how much time your estate has to pay off the loans balance if you die
- what happens if it takes your estate longer than the stated period to fully repay the loan when you die
- what happens if the amount of the loan ends up being higher than your homes value when it’s time to pay the loan back
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