Can A Reverse Mortgage Be Made Without Penalty
If you would like to make payments on the reverse mortgage during the life of the loan, you certainly may do so without penalty. And, when making monthly mortgage payments, an amortization schedule can prove useful. A reverse mortgage amortization schedule is a summary of some important information about the loan:
What Are The Differences Between A 280 280
In New York, there are two types of reverse mortgage loans available to senior borrowers. The first, referred to as a HECM reverse mortgage , is a mortgage loan that is made in accordance with the requirements of the Home Equity Conversion Mortgage program operated by the Federal Housing Administration. HECMs are the only reverse mortgages insured by the Federal Government. The second, referred to as a proprietary reverse mortgage, is a mortgage loan that is made in accordance with the requirements of New Yorks Real Property Law Section 280, or 280-a. Part 79 applies to both proprietary and HECM reverse mortgage loans.
The most important distinction between a HECM and proprietary reverse mortgage concerns the maximum loan amount available under each type of loan. Under the HECM program, the maximum loan amount is capped. Proprietary reverse mortgages, on the other hand, do not have a cap. It is for this reason that they are often referred to as jumbo reverse mortgages.
Second Appraisals On Select Reverse Mortgages
As a requirement, all reverse mortgage borrowers must have an official home appraisal. This is crucial to confirm the propertys current market value, which is a factor that determines the loan amount youll qualify for. The higher the appraised value, the more money you can receive on your reverse mortgage. For this reason, some homeowners may have appraisers overstate the value of their home to obtain larger loans.
In 2018, after widespread appraisal concerns, the FHA began requiring second appraisals on selected loans where they thought the valuations were inflated. This was implemented to reduce risks to the Mutual Mortgage Insurance Fund. FHA Commissioner Brian Montgomery referred to these appraisal issues on the loan process:
We have spent considerable amount of time over the last 30 days, including we locked ourselves in here for almost five hours, and we were triaging the HECM portfolio, looking for deficiencies. Looking for areas of concern, Montgomery said on call with reporters. There was one area where we are going to hone in on and thats appraisals.It did dawn on us that we have a higher appraisal on the front end, he continued. Given the nature of the reverse product, where the properties tend to deteriorate more, obviously were talking about senior citizens, and then now the product is worth less after the life event. Were almost maybe feeling that pain twice.
|Increases over time as interest accrues|
Proprietary Reverse Mortgages
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Be Sure To Explore All Options Before Taking Out A Reverse Mortgage
Reverse mortgages are complicated and usually not the best option for older homeowners seeking access to extra cash. Before taking out a reverse mortgage and tapping into your home equity, you should be sure to explore all of the options available to you. For instance, you might qualify for a state or local program to lower your bills or you could consider downsizing to a more affordable home.
You can learn more about reverse mortgages, as well as other available options for older homeowners, at AARP’s website at www.aarp.org/revmort. Even though you’ll have to complete a counseling session with a HUD-approved counselor if you want to get a HECM, it’s also highly recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.
What To Do Now
If you plan on leaving your home to your children, its important to talk to them now about their repayment options. You may also want to consider talking to a professional about creating an estate plan.
Note: This information only applies to Home Equity Conversion Mortgages , which are the most common type of reverse mortgage loan.
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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.
Can You Walk Away From A Reverse Mortgage
If your outstanding loan balance exceeds the current property value and you can no longer stay in your home, you have a couple of choices. You can either do a deed in lieu of foreclosure or simply walk away. Reverse mortgage loans are non-recourse and its debt cannot be transferred to your estate or heirs.
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How To Avoid Reverse Mortgage Scams
Unfortunately, the promise of reverse mortgages has also been used to scam homeowners.
Because HECMs are federally backed, some unscrupulous lenders have tried to target cash-strapped seniors with the promise that a reverse mortgage is a safe way to access money for retirement. In many cases, the targeted individuals are not told that property taxes, insurance and home repairs must continue to be paid for, causing them to default on the loan and results in an easy payday for the unethical lender.
Other scams include convincing borrowers that they should invest the loan proceeds in risky investment schemes.
Here are some red flags you should be aware of when it comes to reverse mortgage loans:
|Lenders that dont explain the fine print or try to rush you through the loan process|
|Companies that use aggressive sales tactics like fear-mongering and cold calling|
|Lenders who claim you can use a reverse mortgage to purchase a home without a down payment HECMs for purchase will still require you to pay around 50% of the homes value out of pocket.|
|Contractors who say that the best way to pay for costly home repairs is to take out a reverse mortgage|
|Anyone who suggests risky stocks or schemes or signing over the money to a third party|
The best way to avoid being a victim of a reverse mortgage scam is:
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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Rejecting A Reverse Mortgage
Q: Under what circumstances should I not consider a reverse mortgage?A: Because of the upfront costs associated with a reverse mortgage, if you intend to leave your home within 2 to 3 years, there may be other less expensive options to consider, such as home equity loans, no-interest loans or grants that may be offered by your county government or a local non-profit to repair your home, or a tax deferral program, if youre having problems paying your property taxes. Also, if you want to leave your home to your children, then you should consider other options, because in many cases, the home is sold to pay back a reverse mortgage.
Risks Associated With Reverse Mortgages
While taking an HECM is a viable way to obtain supplement income based on your home equity, it comes with disadvantages. Because it uses your home as collateral, if youre not careful, it puts your home at risk. Here are several reasons why taking a reverse mortgage might not work for you.
For a summary of the pros and cons of HECM reverse mortgages, refer to the table below:
|Puts your home at risk of foreclosure|
|Having extra income gives you financial wiggle room in case of emergencies||Most reverse mortgage come with adjustable rates, which means your loan balance can increase over the yearsYour loan balance may end up higher than the propertys value|
|Allows you to purchase a new home that is more suited for senior living||Reverse mortgage payouts are not tax deductible unlike traditional mortgage payments|
|Spouses listed in the loan agreement may remain in the home after the borrower dies||Unlisted surviving spouses may face possible eviction after the borrower dies If your spouse or heirs want to keep thehome, they must pay the reverse mortgage|
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Reverse Mortgage Question& Answers
How Do I Undo A Reverse Mortgage
Is it possible to settle a reverse mortgage so people can keep their home, if they change their minds? Can their children buy it out and keep their parents home?
A reverse mortgage is a powerful vehicle that lets seniors tap into the equity in their homes, even when theyre not able to qualify for a conventional mortgage or home equity line of credit. However, nj.coms recent article, Can we undo a reverse mortgage to keep the home? says that the rules that surround reverse mortgages can be a little confusing.
There are a few common misconceptions about reverse mortgages, one of which is that the bank owns the home.
A reverse mortgage is just an easier way for those 62 and older to qualify for a traditional home equity line of credit, without a requirement to pay back principal and interest over time. This is important to seniors on a fixed income, who may want to borrow cash without a monthly loan payment.
However, the downside to not paying principal and interest, is that over time the loan balance increases rather than decreases.
Just like a traditional mortgage, when the borrower moves or dies, the bank will want to be reimbursed.
If the loan balance is more than the value of the home, the bank takes ownership.
However, if the value of the home is more than the loan value, the homeowneror heirmay sell the home and pay off the loan.
If the homeowner wants to decrease the outstanding loan during homeownership, they can typically do this.
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How Do I Know Which Payment Option Is Right For Me
Choosing the best payment option is tricky and will depend on your personal circumstances and situation. If you are prone to overspending and are concerned about having enough money later on in life when you may not be able to supplement your income, taking out a fixed-rate lump sum may be a poor choice for you.
Benefits Of A Reverse Mortgage
Reverse mortgages have many benefits, but here are a few of the best. If used correctly, a reverse mortgage can help you make the most of your money during retirement.
Tax-Free Proceeds: Any money you get from a reverse mortgage can be used however you want, and you wont ever be taxed on it.
Payout Options: You can receive reverse mortgage funds as a lump sum, a lifetime monthly payment, or a line of credit that grows over time. You can also choose a combination of these payment options, depending on your financial needs and goals.
Retirement Security: If you need to supplement your income, your homes equity may be able to give you the money you need right now. A reverse mortgage is a retirement tool that gives you the freedom to use your retirement savings and investments in the way that is best for you.
Home Ownership Doesnt Change: With a reverse mortgage, you will continue to live in and retain ownership of your home. Since ownership doesnt change, you can still leave the home to your heirs .
Non-Recourse Loan: FHA reverse mortgages are non-recourse loans. This means that if the loan exceeds your homes value, neither you nor your heirs will ever pay more than the home is worth. Additionally, neither your assets nor those of your family are collateral for the loan.
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Understanding The Types Of Reverse Mortgages
There are two types of reverse mortgages available in Minnesota:
What Should I Remember When Thinking About A Reverse Mortgage
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How And When To Repay A Reverse Mortgage
Most people who take out reverse mortgages do not intend to ever repay them in full. In fact, if you think you may plan to repay your loan in full, then you may be better off avoiding reverse mortgages altogether.
However, generally speaking, reverse mortgages must be repaid when the borrower dies, moves, or sells their home. At that time, the borrowers can either repay the loan and keep the property or sell the home and use the proceeds to repay the loan, with the sellers keeping any proceeds that remain after the loan is repaid.
You may need to repay a mortgage either with cash or by selling the home if:
- You have to move into an assisted living facility or have to move in with a family member to help take care of you
- You have family who lives with you who want to keep your property, and you have the money to pay back the loan
Who Should Avoid A Reverse Mortgage
While there are some cases where reverse mortgages can be helpful, there are lots of reasons to avoid them. A reverse mortgage isnt a good option if:
- You cant find a trustworthy lender or a reputable loan program
- You have outside savings or life insurance that you can tap to cover expenses
- You have heirs who want to inherit your property or family members who live with you and who need to stay in the property after the term of a reverse mortgage
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How Home Equity Release Works
‘Equity’ is the value of your home, less any money you owe on it .
‘Home equity release’ lets you access some of your equity, while you continue to live in your home. For example, you may want money for home modifications, medical expenses or to help with living costs.
Ways to access equity in your home include:
- reverse mortgage
- home sale proceeds sharing
- equity release agreement
- the Government’s Pension Loans Scheme
The amount of money you can get depends on:
- your age
- the value of your home
- the type of equity release
Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you’re signing up for.
Refinance Into A Conventional Loan
If you no longer need the additional income provided by a reverse mortgage and can afford to make a monthly mortgage payment, you can refinance your reverse mortgage with a conventional loan. You might consider this path if youre looking to preserve the equity in your home and avoid potential reverse mortgage problems for heirs.
This option might not be feasible if you took out the reverse mortgage because you needed additional income to cover your monthly mortgage expenses or pay for home repairs.
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