How A Reverse Mortgage Works
Before getting a reverse mortgage, you must first pay off and close any outstanding loans or lines of credit that are secured by your home. These can include a mortgage and a home equity line of credit . You can use the money you get from a reverse mortgage to do this.
You can use the remainder of the loan for anything you wish, such as to:
- pay for home repairs or improvements
- help with regular bills
- cover healthcare expenses
- repay debts
A reverse mortgage may limit other financing options secured by your home. You may not be able to take out a HELOC or similar products.
You may be able to get the money from your loan by:
- taking the money as a one-time lump sum
- taking some of the money up front and taking the rest over time
Ask your lender what payment options they offer for a reverse mortgage. Also ask whether there are any restrictions or fees.
Requirements Of A Reverse Mortgage
A reverse mortgage is generally a type of FHA loan, called a, “HECM loan,” While some lenders offer proprietary reverse mortgages, most of these loans are offered by lenders who use the HECM program through the FHA. When considering a reverse mortgage, consider focusing on programs that are FHA-insured and must adhere to federal guidelines. With non-HECM reverse mortgages, you could lose important consumer protections, and you wont be guaranteed the uniform requirements provided by the FHA.
In order to qualify for a reverse mortgage:
- You must be at least 62 years of age.
- You must live in the home as a primary residence.
- You must not be delinquent on federal debt.
- You must be able to keep paying taxes, insurance, and other costs.
- The property must meet FHA requirements.
You can choose to receive your payments as long as you live in the home, or you can set up a set term to receive payments. Its even possible to use a line of credit for your reverse mortgage. No matter what type of payment setup you choose, you cant be forced to sell your home to pay off the mortgage, and you wont have to make payments until you no longer live in the home.
Given this information, a reverse mortgage might seem like a slam dunk, and there are situations in which a reverse mortgage makes sense. However, there are some drawbacks to reverse mortgages that can cause financial harm to some retirees.
How Do You Pay Back A Reverse Mortgage
If you die before youve sold your home, those you leave behind are stuck with two options. They can either pay off the full reverse mortgage and all the interest thats piled up over the years, or surrender your house to the bank.
So, it might seem like a reverse mortgage is a helpful cash-flow option for people in their retirement, but these mortgages put seniors and their heirs at financial risk.
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After A Long Period Of Discussion We
after a long period of discussion we decided to go forward with a chip mortgage. Gaurav made it easy to ask questions and get immediate answers. He was straight forward always acting in a very professional manner which made my husband more in ease with this difficult transition we were making. We highly recommend Gaurav
Reverse Mortgage Lines Of Credit
Reverse Mortgage Lines of Credit are available at some Credit Unions in British Columbia and Ontario. A reverse mortgage line of credit functions like a reverse mortgage in that no payments are required until you sell your house, or you and your surviving spouse pass away. You may make payments of interest or interest and principal if you wish. The limit on the line of credit is based on similar criteria to the reverse mortgage: property value, geographic location, type of housing, and amount of current debt.
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Celebrity Reverse Mortgage Commercial
We all know that just because a celebrity says something on TV that it isnt always true. In fact, often the reason you need a celebrity actor to endorse your product is because you need the trust of the celebrity to convince your audience of your products worth.
The solution to cut through the flattery is to get down to the facts. Would you still be interested in the Reverse Mortgage if it had to stand on its own?
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You Cant Be Forced Into Early Repayment
Repayment of the reverse mortgage will be triggered when one of the following circumstances applies: 1) the home is no longer your primary residence 2) you sell the home or 3) you die.
When you sell the home, youre expected to use the proceeds to pay off your remaining loan balance. However, if the home sells for more than you owe, you can keep the difference and use it for something else.
While you wont have to make monthly loan payments, you will likely have to make monthly payments to cover property taxes and insurance and take care of ongoing maintenance costs.
If you die, your heirs might have to repay the loan. For those whose estates cant afford the loan, heirs might be required to sell the home to get the proceeds necessary. Luckily, though, they wont be expected to pay more than the homes current market value, so they arent liable if the home has lost value.
Should I Apply For A Proprietary Reverse Mortgage
If youre thinking of applying for a proprietary reverse mortgage, keep in mind the general qualification requirements. You must be at least 62 years old and have enough equity in your home. The home must be your primary residence. Youll want to make sure, too, that youre able to continue paying your property taxes and homeowners insurance and maintain your home. Speaking to a financial advisor about your options may be helpful, too.
If youre considering a proprietary reverse mortgage, its a good idea to shop around to find the lender with the best interest rates and lowest fees. Since these are private loans, the lender has more say in qualification requirements, loan terms and how much its able to lend.
When reviewing your financial options, you should also see if a home equity line of credit or a home equity loan makes more sense for your finances and your goals. Rocket Mortgage does not offer home equity loans or HELOCs.
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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.
Reverse Mortgage Process: How Do You Get One
The first thing to do is shop for a lender. Many large banks have stopped writing reverse mortgages, though they are still available at smaller banks and credit unions.
There are also plenty of on-line lenders like One Reverse Mortgage, Liberty Equity Solutions and Home Point Financial Corp.
All mortgages have costs, but reverse mortgages can be pricey compared to traditional mortgages. Between the interest rate, origination fees, mortgage insurance, appraisal fees, title insurance fees and other closing costs, the total could be as high as $40,000.
That would eat up much of the equity a borrower has in their home. And the origination fee is based on the homes value, which is usually much larger than the loan amount.
So it pays to shop around for the best deal. Once you have chosen a lender, the property is appraised to determine its market value. Most reverse mortgages are processed within 30-60 days. Borrowers can receive 50% to 66% of the value of their equity depending on their age and interest rate, which is generally about 5%.
Once the loan is approved, borrowers have four disbursement options lump sum, monthly payments, credit line or a combination of the three.
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What Are The Guidelines For A Reverse Mortgage
Therefore, the four most important borrower rules for reverse mortgages are as follows:
- You must be 62 years of age or older.
- You must own your home.
- You must own your home outright, or have a substantial amount of equity.
- You must live in the home as their primary residence.
- You must complete a financial assestment.
What is the down side of a reverse mortgage?
The downside to a reverse mortgage loan is that you are using your homes equity while you are alive. After you pass, your heirs will receive less of an inheritance. Another possible downside would be regrets by taking a reverse mortgage too early in your retirement years.
what type of home is not eligible for a reverse mortgage?qualifyineligiblereverse mortgages
How Much Can You Borrow
The amount you can borrow depends mostly on the age of the youngest borrower and how much equity you have in the home. Current mortgage rates and your other financial obligations, including any current mortgage, are also factors.
For a government-backed reverse mortgage , the loan limit is equal to the conforming loan limit for a single family home in a high-cost area. In 2021, that limit is $822,375. Loan limits for government-backed reverse mortgages do not vary from one county to another.
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What Can A Reverse Mortgage Be Used For
Supplementing retirement income, covering the cost of needed home repairs or paying out-of-pocket medical expenses are common and acceptable uses of reverse mortgage proceeds, according to Bruce McClary, spokesperson for the National Foundation for Credit Counseling.
In each situation where regular income or available savings are insufficient to cover expenses, a reverse mortgage can keep seniors from turning to high-interest lines of credit or other more costly loans, McClary says.
A Brief Summary Of Reverse Mortgages
- There are no income, asset or credit qualifications
- The borrower must be at least 62 years old
- The property must be the borrower’s primary residence
- The money is withdrawn tax-free, does not affect Social Security or Medicare benefits, and can be used for any purpose the homeowner wishes
- The money can be received as a lump sum, a line of credit, a monthly payment, or any combination of these three options
- There are no mandatory monthly repayments. Most programs can be repaid at any time without penalty
- The title of the home does not change
- The maximum loan amount is set by the lender
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Alternatives To A Reverse Mortgage
If youre not sold on taking out a reverse mortgage, you have options. In fact, if youre not yet 62 , a home equity loan or HELOC is likely a better option.
Both of these loans allow you to borrow against the equity in your home, although lenders limit the amount to 80 percent to 85 percent of your homes value, and with a home equity loan, youll have to make monthly payments. With a HELOC, payments are required once the draw period on the line of credit expires.
The closing costs and interest rates for home equity loans and HELOCs also tend to be significantly lower than what youll find with a reverse mortgage.
Aside from a home equity loan, you could also consider:
What Is A Proprietary Reverse Mortgage
A proprietary reverse mortgage is a private loan that allows you to convert a portion of your homes equity into cash.
As private loans, proprietary reverse mortgages are offered and insured by private lenders and are not backed by the government. That means they are not federally insured, nor are they bound by certain limits set by the Federal Housing Administration . With the ability to loan more than the federal limit, these loans are also known as jumbo reverse mortgages.
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If Your Health Is Poor And You Do Not Think You Can Remain Living In The Home
The terms of a reverse mortgage require you to live in the property as your primary residence.
If you are already in poor health and are looking into possible long term care in the near future, a reverse mortgage may be the wrong choice for you as your loan wouldnt allow you to be living outside the home for a period of more than 12 months.
How To Repay The Money You Borrow
You don’t need to make any regular payments on a reverse mortgage. You have the option to repay the principal and interest in full at any time. However, you may have to pay a fee to pay off your reverse mortgage early.
You have to repay the amount left owing when:
- you sell your home
- you default on the loan
You could default on a reverse mortgage by:
- using the money from the reverse mortgage for anything that is illegal
- being dishonest in your reverse mortgage application
- letting your home fall into a state of disrepair that would lower its value
- not following any conditions in your reverse mortgage contract
Each reverse mortgage lender may have their own definition of defaulting on a reverse mortgage. Ask your lender what could cause you to default.
When you die, your estate has to repay the entire amount owing. If multiple individuals own the home, the loan has to be repaid when the last one dies or sells your home.
The amount of time that you or your estate has to repay a reverse mortgage may vary. For example, if you die then your estate may have 180 days to pay back the mortgage. However, if you move into long-term care, then you might have one year to pay it back. Make sure you ask your lender for information about the timing for paying back a reverse mortgage.
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Is This A Good Time To Get A Reverse Mortgage
A reverse mortgage’s pros and cons, plus alternatives for retirement income
The numbers are worrisome. The typical 54- to 64-year-old with a 401 or IRA owns a median portfolio worth about $135,000 and more than a quarter of workers don’t have retirement savings accounts . Is it any surprise older Americans worry their quality of life could deteriorate during retirement?
On the other hand, the homeownership rate for households age 65 and older has risen to 81% and their median home equity is $143,500, according to the Harvard Joint Center for Housing Studies.
“Many of these older Americans can and will have to rely on home equity to supplement their Social Security benefits.”
All of this raises two key questions: Could tapping that home equity through a reverse mortgage help older Americans attain a financially secure retirement while remaining in their homes? And, if so, given today’s low interest rates, is this a good time to get one?
“For many retirees, home equity represents a significant portion of their wealth,” Shai Akabas, director of economic policy at the Bipartisan Policy Center think tank, said at a Senate Health, Education, Labor and Pensions Committee hearing last spring. “Many of these older Americans can and will have to rely on home equity to supplement their Social Security benefits.”
Reverse Mortgages: Readers Share Their Experiences
There are certain real estate topics that seem to generate a fair amount of excitement and interest among our readers. One of those is a reverse mortgage.
A reverse mortgage allows homeowners aged 62 and older to convert their home equity into either a single lump sum or regular payments, which can be used to fix up the property or travel or even as a supplement to Social Security or other retirement income. Sometimes, a reverse mortgage is used to eliminate a traditional mortgage and free up cash flow for the homeowner.
Unlike a traditional mortgage, where you make regular monthly payments to pay off the loan over a specific period of time, a reverse mortgage requires no monthly payments. The amount due rises over time, and is paid off in full when the home is sold or the owner no longer lives there full-time.
Our recent article on reverse mortgages certainly got the attention of our readers. Wed like to share some of their comments :
I think financial advisers who work with clients nearing retirement should strongly encourage them to get a cash out refinance before they stop working . This would avoid the pressure to take out a reverse mortgage and leave their clients in a stronger financial position. This is what we ultimately did.
This is a far out idea , but in comparison with getting a reverse mortgage, it may be better to take a job long enough to qualify for cash out refinance .
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