Wednesday, January 9, 2013, AM | 6 Comments
Are you at least 62 years old? Do you have enough or full equity in your home? Does it get harder and harder to live on your income? Are you retired and living on fixed income?
If you say YES to any of these questions, reverse mortgage may be a good option for you. It will give you a monthly income – and added to your existing income – that can provide you with the means to live a more comfortable life.
The last few years, consumers have been bombarded with TV, Internet and Print advertisements telling them to seek reverse mortgage for the betterment of their financial life.
What is reverse mortgage?
A reverse mortgage allows you to tap the equity in your home without having to sell or take out another type of loan. It is, in reality, a kind of loan and is indeed the opposite of a regular mortgage. It allows seniors (62+) to borrow against the equity in their home.
Reverse mortgages will gain popularity as more baby boomers are approaching retirement. Debt does not have to be repaid as long as the senior lives. The heirs will inherit the remaining part of the equity in the house.
Unlike the traditional mortgage, in the reverse mortgage, the home owner is able to receive payments rather than make them. The form of the payments is up to the owner:
- It can be a lump sum payment
- Fixed monthly payment
- Line of credit
- A combination of the above.
Each month, interest is subtracted from the home equity balance.
US Department of HUD started it
This form of mortgage was initiated by the US Department of Housing and Urban Development in 1989 and is a federally-insured private loan. It allows many seniors to complement their income and remain to live in the house.
Nothing happens to the house where they live, and they do not have to repay any debt. However, the balance on your mortgage can never surpass the value of the house.
Homeowners never need to worry about the size of their balance unless they decide to sell the house, as then the balance on the loan becomes payable.
The Home Equity Conversion Mortgage remains the most popular type of reverse mortgage.
Maximum loan amount
Maximum loan amount on a reverse mortgage is derived primarily from consideration of the four factors:
- The age of the youngest borrower
- The location of the home
- The value of the home
- The current interest rate.
Certain requirements have to be met in order to be eligible for reverse mortgage.
- The home must be occupied as a primary residence for the greater part of the year.
- The range of eligible properties includes town homes, detached homes, condominium units, planned unit developments and some manufactured homes.
- You have to own the house free and clear, or have only a small amount of mortgage pending.
- For consumer protection, all who want to take out such a mortgage will have to participate in a free educational session with a HUD-approved counselor that will allow them to decide whether this is the best option.
Reverse mortgage has its downside too
There are some issues and concerns you must be aware of.
- Only those aged 62 or older can qualify.
- Retirees willing to take advantage of this option have to pay high start-up costs as they have to insure the loan.
- You will have to deplete the property you want to leave to your relatives.
- Insured by the Federal Housing Administration (FHA), which has set a loan limit of up to $417,000 for your reverse mortgage.
Questions to ask and think about
Ask the reverse mortgage provider as many questions as you possibly can until you are satisfied with the arrangement.
Ask yourself questions concerning your needs.
- Do you really need a reverse mortgage?
- Why are you interested in these loans?
- What would you do with the money you would get from one?
- Are the needs you intend to meet really worth the high total cost of these loans?
Ask yourself questions concerning whether you can afford it.
- Can you afford a reverse mortgage?
- These loans are very expensive, and the amount you owe grows larger every month.
- The younger you are when you take out a reverse mortgage, the more the compound interest will grow, and the more you will owe.
Using up home equity
Ask yourself questions concerning equity in your home.
- Can you afford to start using up your home equity now?
- The more you use now, the less you will have later when you may need it more, for example, to pay for future emergencies, health care needs, or everyday living expenses.
Less costly options
You may do research about what else is available.
- Do you have less costly options?
- Do you have other financial resources that you could use instead of taking out a loan?
- If you don’t, and if you could easily make the monthly repayments on a home equity loan or home equity line-of-credit, these alternatives are much less costly than a reverse mortgage.
Yake steps only when you completely understand and realize your situation.
- Do you fully understand how these loans work?
- Reverse mortgages are quite different from any other loans, and the risks to borrowers are unique.
- Before considering one, you need to do your homework carefully and thoroughly.
Make sure your lender is viable
Check your lender with the following organizations:
- Approved by the Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD).
- Member of NRMLA, the National Reverse Mortgage Lenders Association and strictly adhere to its Code of Conduct.
In a Nutshell
Reverse mortgage is a good idea especially if your fixed income is not enough to live a “comfortable” life. As long as you understand the issues and the concerns about it, you should do OK.