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Reverse mortgages are popular with seniors because they do not require monthly mortgage payments. However, reverse mortgages can be complex financial products with high fees and interest costs attached – be wary of high-pressure sales tactics and read your loan contract thoroughly to make an informed decision.
Reverse mortgage loans differ from traditional mortgages in that their payments don’t take effect until your home is sold, you pass away, or move out, which could potentially reduce your heirs’ inheritance.
Benefits
Reverse mortgages enable seniors to tap the equity in their home without making monthly mortgage payments, similar to regular mortgages but without needing to repay it until moving out or selling the house. Borrowers have three payment options when receiving funds: lump sum, line of credit or monthly payments – although any combination may also work. It is essential for borrowers to consult a housing counselor and financial planner when selecting which type and method of reverse mortgage they will take out as it could impact eligibility for need-based assistance programs such as Supplemental Security Income or Medicaid eligibility.
As well as offering reverse mortgages, many lenders also provide other financial products and services. These may include annuities and long-term care insurance policies. As some may require a significant upfront investment, consumers should carefully research any product being considered by lenders before making their decisions. It is illegal for them to pressure borrowers into purchasing these products simply so they can obtain a reverse mortgage loan.
Home Equity Conversion Mortgage, or HECM, is the most prevalent form of reverse mortgage loan available today and comes with stringent requirements to protect both lenders and borrowers. For instance, an HECM has both an initial mortgage insurance premium (IMIP) paid at closing as well as monthly premiums charged based on percentage of loan balance each month.
A further advantage of HECM loans is their nonrecourse nature; meaning the borrower never owes more than what their home is worth even if the sale price drops short of what was owed on their loan. This feature should be kept in mind if leaving their house to children or heirs as inheritance.
One major drawback of reverse mortgages is their interest-rate creep, leading to ever-increasing loan balances over time. This may present difficulties for the remaining spouse who wants to remain in their home as it will become harder for them to afford taxes and insurance payments; also if borrowers do not keep up payments of property taxes and homeowners insurance they could risk facing foreclosure proceedings.
Expenses
Reverse mortgages offer seniors who want to remain in their homes an ideal solution, but it’s essential to understand all of its costs before proceeding. Lenders typically charge origination, servicing and third-party closing charges in addition to an upfront mortgage insurance premium – up to two percent of either your appraised value or FHA lending limit, whichever is lesser – plus any monthly accruing interest which gets added onto the loan balance.
Seniors often turn to reverse mortgages to supplement their retirement income, cover home repairs or cover out-of-pocket medical expenses. According to Bruce McClary of the National Foundation for Credit Counseling, reverse mortgages can help keep seniors from turning to costly lines of credit to fund daily expenses. However, they should only ever be used as an absolute last resort and if used irresponsibly could leave borrowers facing substantial financial obligations upon leaving or death of the borrower.
Borrowers who take out reverse mortgages have the choice of receiving their proceeds in various forms – lump sum, monthly payments or as a line of credit. Loans last until either death or relocation occurs at which point any remaining balance must be repaid along with accrued interest. Once that occurs, their heirs can take ownership or sell it off in order to repay any outstanding balances and any accrued interest due.
Many older homeowners fear their heirs will be required to repay a loan upon their passing, though this usually is not necessary. If their estate does not cover it entirely, however, heirs will need to sell the home in order to cover debts owed.
Likewise, if heirs wish to keep the home they will need to pay off any existing reverse mortgage loans and demonstrate they can afford both mortgage payments and living expenses; proving this may prove challenging if any heirs under age 62 do not qualify as co-borrowers.
Requirements
Reverse mortgages offer an effective way of unlocking money from your home, but they have several requirements. First, applicants must be at least 62 years old; secondly, you must own or have significant equity in their home; lastly they must still reside there as their primary residence and attend housing counseling from an approved HUD agency; this counseling session enables participants to understand the risks and benefits associated with reverse mortgages while giving lenders more information on your financial status and situation.
A lender will review your credit report to ensure you can afford property taxes, homeowners insurance and homeowner association (HOA) fees as well as your spending habits to determine whether a reverse mortgage would work for you. They also consider federal debt such as income taxes or student loans which might preclude them. Some lenders provide single-purpose reverse mortgages that may only be used to pay property tax bills or repair home repairs.
Lenders typically do not require you to have a minimum equity stake in your home, but you must maintain it as your primary residence and meet age and income criteria to qualify for funds through loans. Your home must also be in good condition – an inspector will conduct an inspection to assess whether or not this condition exists.
One of the primary benefits of a reverse mortgage is that its interest is not tax-deductible by the IRS. This allows you to use its proceeds for higher-interest debt repayment or improving savings; however, upon your death your heirs must repay any unpaid balances of your reverse mortgage loan.
As opposed to conventional mortgages, reverse mortgages do not report directly to credit bureaus. Nonetheless, their use can have an impact on your score if used for repaying other debts or investments. You should be wary of anyone trying to sell you products or investments schemes using your reverse mortgage proceeds.
Cancellation
Reverse mortgages are loans designed specifically to serve older homeowners aged 62 years or over who wish to borrow against their equity without making monthly payments. Also known as home equity conversion mortgages (HECM), reverse mortgage loans are insured by the Federal Housing Administration (FHA), with participants paying an annual insurance premium in order to take part and fund reserves in case someone defaults.
FHA recently issued new guidelines mandating all HECM borrowers undergo a financial assessment, in order to assess their ability and willingness to keep up with property taxes and insurance payments. This measure aims to reduce foreclosures caused by nonpayment of property taxes or insurance; defaulting borrowers could face foreclosure due to tax lien foreclosure.
Many seniors feel strongly connected to their home and want it in the hands of their family after they pass. Some don’t feel ready to sell in order to repay a loan; as an alternative they could consider refinancing into a conventional mortgage.
Some lenders charge servicing fees to cover the administrative costs associated with reverse mortgage loans. These fees tend to be small and can be added directly onto the principal balance of your loan, although certain states prohibit or allow their charging pro rata over the life of a loan; depending on its terms, some fees may even be considered income by the Internal Revenue Service and some lenders also charge interest on annuity advances.
When contemplating a reverse mortgage, it is vitally important that you consult with an experienced professional who can provide all of the relevant information that will allow you to decide whether this option is the right choice for you. Furthermore, be wary of companies offering these loans free or at reduced costs with what appears to be government seal – these may be scams which affect eligibility for other forms of income.
