Home Equity Loan Or Home Equity Line Of Credit
Home equity loans and home equity lines of credit provide homeowners access to home equity. But the way borrowers receive the loan proceeds differs. With a home equity loan, homeowners receive a lump sum, while borrowers access funds as needed within a specific time frame with a HELOC.
Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments however, they may come with fewer fees and can be a less expensive alternative to refinancing a reverse mortgage.
Youre Protected If The Balance Exceeds Your Homes Value
Because a reverse mortgage balance grows in size, its possible that it can exceed the fair market value of the property over time. However, the amount of debt that must be repaid can never exceed the propertys value, because a reverse mortgage is an example of non-recourse financing. The result is that a mortgage lender can have no claims against your other assets, or heirs, in this scenario.
You Need More Cash Than A Reverse Mortgage Provides
Other home equity options might provide more cash than a reverse mortgage. For example, a cash-out refinance replaces the existing loan with a new loan and the borrower receives a lump sum of cash. Refinancing a reverse mortgage to a cash-out refinance may give a borrower a larger payout than the lump sum payment from a reverse mortgage. However, borrowers who refinance a reverse mortgage to a cash-out refinance will need to make payments.
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What Are The Three Types Of Reverse Mortgages
- Single-purpose reverse mortgages:the most affordable option out of the three. They are typically only executed for one purpose, which is often specified by the loaner. An example could be a big home repair, like a roof replacement. Single-purpose reverse mortgages are most common for homeowners with low to moderate income.
- Proprietary reverse mortgages: more expensive and most common for homeowners with a higher home value, allowing the borrower to access home equity through a private lender.
- Home Equity Conversion Mortgages : the most common, but still more expensive than single-purpose mortgages. HECMs are federally backed by the U.S. Department of Housing and Urban Development . A HECM line of credit can usually be used at the homeowners discretion, unlike the single-purpose reverse mortgages.
The Bottom Line: It’s All About Your Finances
Managing loans on a fixed income as a senior citizen can be challenging but it isnt impossible. Make sure you include all of your income when you apply. You can also improve your chances of a refinance by sticking with your current lender and maximizing your appraisal value.
Ready to get started? You can start your refinance or mortgage application online now.
Protect what’s precious
Other Factors To Consider
Every situation is different, and there are likely cases where someone faced with scenario A would not refinance while someone faced with scenario B would. For example, an individual faced with scenario B may find that adding a spouse to the loan or giving added protection to a non-borrowing spouse through refinancing still makes the decision worthwhile.
If Your Heirs Need To Sell The Home
Some heirs may lack funds to pay off the loan balance and may need to sell the home in order to repay the reverse mortgage loan. If the balance owed on the loan is more than the home is worth, your heirs wont have to pay the difference. If your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.
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How To Qualify For A Reverse Mortgage
You must meet these qualifications to be eligible for a reverse mortgage:
- Be at least 62 years old
- Own one of these eligible property types: single-family home, two- to four-unit home , condo approved by HUD or the FHA, manufactured home approved by the FHA
- Live in the property as your main home
- Be able to afford ongoing homeowners insurance, property taxes, maintenance, and, if applicable, flood insurance and homeowners association fees
- Own your home outright, or have at least 50% equity in your home
- Complete a HUD-approved reverse mortgage counseling session
- Not be delinquent on any federal debt
Reverse Mortgages Your Spouse And Your Heirs
Both spouses have to consent to the loan, but both dont have to be borrowers, and this arrangement can create problems. If two spouses live together in a home but only one spouse is named as the borrower on the reverse mortgage, then the other spouse is at risk of losing the home if the borrowing spouse dies first. A reverse mortgage must be repaid when the borrower dies, and its usually repaid by selling the house. If the surviving spouse wants to keep the home, then the mortgage loan will have to be repaid through other means, possibly through an expensive refinance.
Only one spouse might be a borrower if only one spouse holds title to the house, perhaps because it was inherited or because its ownership predates the marriage. Ideally, both spouses will hold title and both will be borrowers on the reverse mortgage so that when the first spouse dies, the other spouse continues to have access to the reverse mortgage proceeds and can continue living in the house until death. The non-borrowing spouse could even lose the home if the borrowing spouse had to move into an assisted living facility or nursing home for a year or longer.
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Is A Reverse Mortgage Expensive
Home equity conversion mortgages , the most common type of reverse mortgage, bring a number of fees and costs. Some are one-time fees, and some are ongoing costs.
Before even taking on the reverse mortgage, all borrowers taking out a HECM reverse mortgage loan must undergo counseling from a U.S. Department of Housing and Urban Development -approved reverse mortgage counselor. Counseling costs will vary, depending on the agency and the borrowers specific circumstances. Other fees include origination fees, closing costs, and mortgage insurance premiums. Youll also have to pay servicing fees to the lender for costs such as sending account statements, distributing loan proceeds, and making certain that you keep up with the loan requirements.
Is It Possible To Refinance A Reverse Mortgage
Yes, refinancing a HECM Loan is similar to refinancing a traditional mortgage. Youre simply replacing the current loan with a new one, which may offer better terms and lower your monthly payments. For example, you might choose to refinance a reverse mortgage if interest rates have fallen since you first obtained the loan or if there is a time when you need more money than your current loan can provide.
The Five Times Benefit Rule
The five times benefit rule ensures that refinancing the reverse mortgage benefits the borrower. It protects homeowners against loan churning a practice used by predatory lenders to encourage borrowers to refinance a reverse mortgage when there is no advantage to them.
The five times benefit rule states that the money available to the borrower must equal at least five times the refinancing fees, including closing costs. For example, if fees total $5,000, the loan refinance must give the buyer access to at least $25,000.
When Do You Pay Back A Reverse Mortgage
In most instances, you dont have to pay back the reverse mortgage loan as long as you live in the house. However, the loan will become due and payable in any of the following situations:
- Death. When you die, your heirs become responsible for paying back the mortgage or reaching an arrangement with the financial institution.
- Selling the property. The loan is paid off with the sale proceeds.
- Living outside the home for one straight year. If you live away from the house for more than 12 consecutive months, you might need to start paying the loan. If your spouse is a co-borrower or an eligible non-borrowing spouse, they could stay in the home without paying back the loan.
- Not paying property taxes or homeowners insurance. All reverse mortgages require that the borrower pay taxes and homeowners insurance. Failure to do so will result in foreclosure. If you are unable to pay, seek a reverse mortgage counselor right away.
- Not maintaining the house. The home needs to be kept in livable condition.
Once the loan is due, you or your heirs need to speak with your lender to determine a time period to settle the loan balance. This time period varies depending on the situation, but it could be as little as 30 days in some cases before the lender begins the foreclosure process.
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How Do I Refinance A Reverse Mortgage
The process of refinancing a reverse mortgage is very similar to refinancing any other type of loan. Youll first need to contact your existing lender and request an application for the new loan. Then, complete the application process and proceed with whatever documentation youve been asked to provide. Your lender will perform a series of checks to ensure you can afford the new loan and that your home is still worth at least as much as the current loan. If all of this checks out, youll be able to proceed and receive a new reverse mortgage with better terms and conditions.
The best approach to go forward is to contact your reverse mortgage refinancing professional for assistance.
How Does A Reverse Mortgage Work When You Die
Its important to have a plan to deal with your reverse mortgage loan after you die. Family members also need to understand their options for keeping the house, as well as their payment responsibilities. Repaying the loan can get complicated, depending on how much equity you have in your house and whether you want the house to stay in your family after your death.
Can You Lose Your House With A Reverse Mortgage
As with any mortgage, there are conditions for keeping your reverse mortgage in good standing, and if you fail to meet them, you could lose your home. The ways you could violate the terms of a reverse mortgage include:
- The home is no longer your primary residence.As part of the reverse mortgage agreement, the home must be your primary residence. This means that you cannot leave the home for more than 12 consecutive months, explains Michael Micheletti, spokesperson for Unlock Technologies, a company that helps homeowners access their equity. This rule doesnt bar you from leaving your home to travel or to come and go as you please, but if you vacate the property for 12 consecutive months, the reverse mortgage loan becomes eligible to be called due and payable.
- You decided to move or sell your home.If you have to move and put your home up for sale as part of the move, youre still bound by the requirement to live in the house for 12 consecutive months. If selling your home becomes a challenge and you dont find a buyer within that 12-month window, the reverse mortgage can be called due, Micheletti says.
- You dont pay your property taxes or homeowners insurance. Even with a reverse mortgage, youre still responsible for paying property taxes, and failure to do so could violate the terms of your loan. In addition, you must maintain current homeowners insurance.
Who Can Get A Reverse Mortgage
Reverse mortgages are only available to homeowners who are 62 and older. If youre 62 but your spouse is 60, you could take out a reverse mortgage but they would not be able to be on the loan.
To ensure they could stay in the home if you pass away or move into assisted living, you have two options: you can name them as a non-borrowing spouse when you take out the loan, or you can refinance to add them to the mortgage when they turn 62.
In addition to the age requirement, homeowners must have significant equity in their homes typically 50% or more, though lenders may be able to approve you with less, depending on the circumstances.
The home must be your primary residence to qualify for a reverse mortgage, meaning it is where you live most of the year.
Finally, the home must be a qualifying property type:
- Single-family home
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You Want To Go From An Adjustable Rate To A Fixed Rate Or Change How You Receive Your Money
Reverse mortgages have either a fixed interest rate or adjustable rate and the type of rate determines how borrowers receive their payments. Homeowners with a fixed rate receive a lump sum payout, while those with an adjustable rate can choose between monthly payments, a line of credit or a combination of the two.
There are benefits and drawbacks to both types of interest rates and the related payouts. A fixed rate is predictable, while adjustable rates are less stable. And monthly payments can be beneficial for budgeting, whereas a lump sum can be easier to spend through. Borrowers who have a change in circumstances may want to refinance a reverse mortgage to change the interest rate type and how they receive their payments.
Maximize Your Appraisal Value
The appraisal is an important part of the refinancing process. During an appraisal, an appraiser will tour your property and give you an estimate of how much your home is worth. Lenders require appraisals because the appraisal assures your lender that theyre not loaning out more money than your home is worth. Maximizing your appraisal value can increase your chances of qualifying for a refinance. This is especially true if you want to take cash out of your equity.
Use these simple tips to increase your home’s value before your appraisal:
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How Much Does A Reverse Mortgage Cost
The closing costs for a reverse mortgage arent cheap, but the majority of HECM mortgages allow homeowners to roll the costs into the loan so you dont have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan.
Heres a breakdown of HECM fees and charges, according to HUD:
- Mortgage insurance premiums There is a 2 percent initial MIP at closing, as well as an annual MIP equal to 0.5 percent of the outstanding loan balance. The MIP can be financed into the loan.
- Origination fee To process your HECM loan, lenders charge the greater of $2,500 or 2 percent of the first $200,000 of your homes value, plus 1 percent of the amount over $200,000. The fee is capped at $6,000.
- Servicing fees 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 rate adjusts monthly.
- Third-party fees Third parties may charge their own fees, as well, such as for the appraisal and home inspection, a credit check, title search and title insurance, or a recording fee.
Keep in mind that the interest rate for reverse mortgages tends to be higher, which can also add to your costs. Rates can vary depending on the lender, your credit score and other factors.
What Is A Reverse Mortgage
In a word, a reverse mortgage is a loan. A homeowner who is 62 or older and has considerable home equity can borrow against the value of their home and receive funds as a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgagethe type used to buy a homea reverse mortgage doesnt require the homeowner to make any loan payments.
Instead, the entire loan balance becomes due and payable when the borrower dies, moves away permanently, or sells the home. Federal regulations require lenders to structure the transaction so that the loan amount doesnt exceed the homes value and that the borrower or borrowers estate wont be held responsible for paying the difference if the loan balance does become larger than the homes value. One way that this could happen is through a drop in the homes market value another is if the borrower lives for a long time.
How Does A Reverse Mortgage Work?
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Do This To Avoid Foreclosure From A Reverse Mortgage
Another danger associated with a reverse mortgage is the possibility of foreclosure. Even though the borrower isnt responsible for making any mortgage paymentsand therefore cant become delinquent on thema reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions allows the lender to foreclose.
As a reverse mortgage borrower, you are required to live in the home and maintain it. If the home falls into disrepair, it wont be worth fair market value when its time to sell, and the lender wont be able to recoup the full amount that it has extended to the borrower. Reverse mortgage borrowers are also required to stay current on property taxes and homeowners insurance. Again, the lender imposes these requirements to protect its interest in the home. If you dont pay your property taxes, then your local tax authority can seize the house. If you dont have homeowners insurance and theres a house fire, the lenders collateral is damaged.
About one in five reverse mortgage foreclosures from 2009 through 2017 was caused by the borrowers failure to pay property taxes or insurance, according to an analysis by Reverse Mortgage Insight.
|Reverse Mortgage Interest Rates