Shopping For The Right Lender
How do you find the best deal for your circumstances? Do you just call the company based on a commercial you saw, a flyer you got in the mail or what?
For some borrowers, it is much easier than others because they are proficient using the internet and they have no problem shopping and comparing loan programs and costs. This is an extremely important step, and we advise borrowers to check online reviews and to get several proposals. Dont look at just one or two items but review the whole deal.
For example, some companies have learned that they can artificially lower the cost of just one or two fees by a small amount and then raise rates or other fees that can cost borrowers tens of thousands of dollars in other areas.
Dont settle for one company that charges a lower appraisal fee only to find out too late that you just incurred a margin or other costs that will mean literally thousands of dollars more in costs to you or your heirs.
Can You Get Out Of A Reverse Mortgage
If you want to get out of a reverse mortgage, there are a few ways you may do so. When it comes to deciding which option is best for you, consider your goals and your financial situation. Some options may come with costs and others may require a lifestyle change like moving out of the home. When considering your options, it may be best to speak to a financial advisor or a reverse mortgage counselor who is approved by the Department of Housing and Urban Development .
What Are The Costs Of A Reverse Mortgage
HUD adjusted insurance premiums for reverse mortgages in October 2017. Since lenders cant ask homeowners or their heirs to pay up if the loan balance grows larger than the homes value, the insurance premiums provide a pool of funds that lenders can draw on so that they dont lose money when this happens.
One change was an increase in the up-front premium, from 0.5% to 2.0%, for three out of four borrowers and a decrease in the up-front premium, from 2.5% to 2.0%, for the other one out of four borrowers. The up-front premium used to be tied to how much borrowers took out in the first year, with homeowners who took out the mostbecause they needed to pay off an existing mortgagepaying the higher rate. Now, all borrowers pay the same 2.0% rate. The up-front premium is calculated based on the homes value, so for every $100,000 in appraised value, you pay $2,000. Thats $6,000 on a $300,000 house, for example. In fact, the fee is capped at $6,000, even if your home is worth more.
All borrowers must also pay annual MIPs of 0.5% of the amount borrowed. This change saves borrowers $750 a year for every $100,000 borrowed and helps offset the higher up-front premium. It also means that the borrowers debt grows more slowly, preserving more of the homeowners equity over time, providing a source of funds later in life, and increasing the possibility of being able to pass down the home to heirs.
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Who A Reverse Mortgage Is Right For
Reverse mortgages arent good for everyone. Only certain borrowers qualify, but their structure also only makes them appropriate for certain borrowers. A reverse mortgage may make sense for:
- Seniors who are encountering significant costs late in life
- People who have depleted most of their savings and have considerable equity in their primary residences
- People who dont have heirs who care to inherit their home
What Types Of Reverse Mortgages Are There What Are The Differences Between Them
There are three main reverse mortgages: single purpose, proprietary, and federally-insured, also known as home equity conversion mortgages .
Most people dont know it, but you can also finance a new home with a reverse mortgage, through a fourth type: the home equity conversion mortgage for purchase . The differences between them will be outlined below, but they mainly differ in terms of purpose for which they can be used and who insures them.
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How You Can Use A Reverse Mortgage
Reverse mortgages give you the flexibility to use your home equity in a number of different ways. With a Home Equity Conversion Mortgage you can:
- Pay off your current mortgage and other expenses to reduce your monthly expenses
- Remodel your home to accommodate changing health and age limitations
- Keep a line of credit for unexpected expenses and financial emergencies
- Pay for health insurance until youre eligible for Medicare coverage or Social Security income
- Supplement your retirement income
- Pay for long term care and health needs
- Pay for transportation if youre unable to drive
- Pay for a child or grandchilds college or professional education
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Is A Reverse Mortgage Expensive
Reverse mortgages do come at a cost, and this expense can be divided into two categories: upfront and ongoing costs. Upfront costs include counseling, an origination fee, an appraisal fee, an initial mortgage insurance premium and third-party closing costs. Most of these fees can by rolled into your loan balance. Ongoing costs include an ongoing mortgage insurance premium, the loans interest and a monthly servicing fee. Your loan specialist will provide you with all the reverse mortgage information you need to determine the exact cost of your loan so that you can decide if the option is too expensive for you.
Reverse Mortgages Closing Costs
The federal government administers HECMs and regulates the closing costs. Proprietary or jumbo reverse mortgages are not regulated, and their closing costs are not regulated.
For HECMs, there are two options to pay the closing costs. You can add them to your loan balance. You may also opt to pay for the closing costs out of pocket.
Generally, closing costs paid to the government are non-negotiable, though you may negotiate certain fees with the lender.
Here are some examples of costs you need to take note of:
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Reverse Mortgage Problems For Heirs
Inheriting a home with a reverse mortgage attached to it can be challenging. Heirs must decide whether to pay off the reverse mortgage out of pocket and keep the property or sell the home and use the sale proceeds to repay the balance.
Fortunately, if they do sell the home, they won’t ever owe more than the homes worth . In the event the home sells for less than the total reverse mortgage balance that’s due, FHA mortgage insurance will cover the difference.
How long do heirs have to pay off a reverse mortgage?
Heirs typically have 30 days to pay off the loan balance. In some cases, you may be able to request an extension of up to a year. A lender might grant this if youre actively trying to sell the home or youre working on obtaining financing . This information mainly applies to federally backed loans, though lenders may make exceptions for proprietary mortgages too.
If the heirs do not pay back the loan within the agreed-upon timeframe, the lender may foreclose on the home.
Refinance The Reverse Mortgage
Perhaps it isnt the reverse mortgage you want to get out of, but the specific terms of your reverse mortgage that are the problem. If thats the case, you could consider refinancing your current reverse mortgage into one with better terms. If interest rates are lower than when you first got your loan or your homes value has increased, you could refinance into a new reverse mortgage. This could give you a better interest rate, change an adjustable rate to a fixed rate, help you pay your loan off faster or provide access to more equity.
Keep in mind that youll need to pay closing costs for a refinance.
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Reverse Mortgage Application Process
There are various steps a borrower needs to complete when applying for a reverse mortgage. The process may vary per lender but typically takes 60 to 90 days. Shop around and compare lenders to find the best deal available to you.
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Counseling and Application
If you are interested in getting a reverse mortgage, it is wise to undergo counseling first with a HUD-approved counselor. A counselor can help you understand the costs and benefits of reverse mortgages. You will receive a certificate when you complete counseling and can apply with a lender, who will conduct a financial assessment.
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Approval, Appraisal and Closing
You need a satisfactory financial assessment from your lender, or they may deny the loan. The lender will appraise your homes value if you receive loan approval. This will be the basis of the maximum loan amount. You then sign documents to close the loan, and the lender will record a mortgage lien on your property.
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Payouts
After closing the loan, you will receive the proceeds based on your chosen payout. It may be a lump sum, line of credit, fixed monthly payments or a combination of these options.
Typically you will pay off the loan after vacating the property, whether through a sale, death or other causes. You or your estate will have to repay the loan. If the loan balance exceeds your propertys value, your heirs may opt to turn over your home to the lender.
Reverse Mortgage Terms You Should Know
Reverse mortgages use a lot of the same terms that forward mortgages also use. But there are some terms that are exclusive to reverse mortgages that you may not have been exposed to and we want to help by defining some of the more often used terms. This list is not all-encompassing but will give you a very good start on understanding the more common reverse mortgage terms you may hear used during a transaction.
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When Is A Reverse Mortgage A Bad Idea
Reverse mortgages are not right for everyone, and its important to weigh reverse mortgage pros and cons to recognize when its not the right option for you. Two main reasons people opt not to pursue the loan is when they have a strong desire to leave their home free and clear to their heirs, or when they know they are likely to move in the near term, in which case the expense of taking the loan is simply not worth it.
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.
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How A Reverse Mortgage Works
With a reverse mortgage, instead of the homeowner making payments to the lender, the lender makes payments to the homeowner. The homeowner gets to choose how to receive these payments and only pays interest on the proceeds received. The interest is rolled into the loan balance so that the homeowner doesnt pay anything up front. The homeowner also keeps the title to the home. Over the loans life, the homeowners debt increases and home equity decreases.
As with a forward mortgage, the home is the collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the homes sale go to the lender to repay the reverse mortgages principal, interest, mortgage insurance, and fees. Any sale proceeds beyond what was borrowed go to the homeowner or the homeowners estate . In some cases, the heirs may choose to pay off the mortgage so that they can keep the home.
Reverse mortgage proceeds are not taxable. While they might feel like income to the homeowner, the Internal Revenue Service considers the money to be a loan advance.
How To Spot A Reverse Mortgage Scam
Below are some tips to avoid becoming a victim of reverse mortgage scams:
- Dont reply to unsolicited reverse mortgage offers by email or over the phone.
- Never give out confidential personal information over the phone or by email.
- Contact a HUD-approved counselor if youre not sure an offer is legitimate.
- Dont sign anything you dont understand.
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Shopping For A Reverse Mortgage
If youre considering a reverse mortgage, shop around. Decide which type of reverse mortgage might be right for you. That might depend on what you want to do with the money. Compare the options, terms, and fees from various lenders. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. And ask lots of questions to make sure a reverse mortgage could work for you and that youre getting the right kind for you.
Here are some things to consider:
Reverse Mortgage Loan Limits
The borrowing limits for reverse mortgages vary depending on the lender and the borrowers payment plan. Generally, borrowers cannot borrow up to 100% of their propertys value. That is because the loan balance is increasing and not decreasing.
If the lender allows a borrower to take out a loan equal to the home’s entire value, the borrowers mortgage would be underwater immediately. Lenders need an equity cushion to prevent the loan balance from growing higher than the property value.
- HECM Loan Limits: Lenders use a table provided by HUD to determine a borrowers loan limits. Generally, they consider two factors: the mortgage interest rate and the age of the youngest borrower or eligible non-borrowing spouse. You can check out MoneyGeeks reverse mortgage calculator to find out how much you can borrow with a HECM. Keep in mind that a higher interest rate on your loan will result in being eligible to borrow less money.
- Proprietary and Jumbo Loan Limits: Borrowers who want a maximum loan amount higher than whats available with a HECM loan can consider proprietary or jumbo reverse mortgages. Since they are from private lenders, they are not subject to HUD rules. They also may not have the same protections from foreclosure.
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Counseling Agency And Counseling Certificate
The counseling agency is a third party that is approved by HUD to provide education to borrowers about the reverse mortgage that comes from an educator and not a lender. Once a borrower has completed the counseling session and has demonstrated a general understanding of the loan program, the counselor will give the borrower a Counseling Certificate indicating successful completion of the session. A lender cannot get the HUD Case Number to proceed without this certificate number.
How Can I Access The Funds
Borrowers can choose between a fixed- or adjustable-rate loan and can access their proceeds in a number of ways:
- A lump sum at closing
- Monthly payments, either a tenure payment for the life of the loan or a term payment for a set number of years
- A line of credit
- A combination of a line of credit and monthly payments
Generally, borrowers can access up to 60% of their principal limit within the first year, unless there is an existing mortgage balance that exceeds this amount. When this is the case, borrowers can take enough to pay off their mortgage, plus an additional 10% of the principal limit in cash.
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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
When Is A Reverse Mortgage A Bad Choice
If you want to leave your house to your heirs scot free, then a reverse mortgage may not be the best choice for you, as in the event of your death, they would have to pay the balance on your loan. The same applies if you live with someone.
Since one of the conditions of the mortgage is that you must be the primary resident of the home, the loan becomes due once thats no longer the case, and whoever is living with you would have to move out if they did not co-sign the loan with you. To find out more, check out our foreclosure article.
Perhaps you need the money for medical bills. While this is certainly a viable way to obtain some cash for medical expenses, if your condition is such that it may require you leaving the home for a care facility for 12 months or more, then the mortgage automatically defaults. If it isnt paid, the lender forecloses and sells.
If youre thinking of moving soon and arent taking out an H4P mortgage, the upfront costs for a reverse mortgage can mount up quickly, including an origination fee, up-front mortgage insurance and its ongoing premiums, as well as closing costs, which include property title insurance, a home appraisal fee and a home inspection fee.
Just like with any major financial decision, we recommend you first consider what you need the money for, and the study your options carefully. See if a home equity loan makes more financial sense.
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