Reverse Mortgages 101
June 27, 2013
Reverse mortgages have gained popularity in recent years among people in the retirement phase of their life.Â Reverse mortgagesÂ are attractive to retirees living on fixed incomes because they donâ€™t have to make any payments while theyâ€™re living in their house.
However, it is important to remember that although youâ€™re not making payments, a reverse mortgage is a loan and at some point it will have to be paid back â€“ along with fees and interest.
How Does a Reverse Mortgage Work?
Applying for a reverse mortgage is similar to getting other types of loans, but your credit and income don’t matter because youâ€™re borrowing against home equity. Lenders look atÂ your age, interest rates, and how much equity you have in the home (as well as the market value of the home)Â when consideringÂ applications for a reverse mortgage. Since the reverse mortgage is intended primarily for retirees, income levels areÂ a moot point.
A mortgage lender will get an appraisal to determine the market value of your home and how much you are eligible to borrow. Then you can decide how you want to receive your money; as a single lump sum, as a line of credit, or in the form of regular payments.
Reverse Mortgage Payments
How you elect to receive the money depends on what you use the money for. Some people take out a reverse mortgage and use a lump sum to pay some major expense. Others are looking to make up for a shortfall in their monthly cash flow, and choose to receive payments monthly.
Reverse Mortgage Fees
LendersÂ will charge you an origination fee, mortgage insurance,Â and closing costs to process a reverse mortgage. This can be a lot to pay if youâ€™re on fixed income so many lenders will let you roll these costs into the loan. When the Federal Housing Administration (FHA) defined the reverse mortgage product they created a cap on the origination fee. The fee can’t be more 2% of the first $200,000 and 1% thereafter, with an overall cap of $6,000.
Reverse Mortgage Eligibility
Since the FHA insures reverse mortgages, they set following criteria about who qualifies for a reverse mortgage. You must:
- Be at least 62 years old. (Some lenders will offer non-FHA reverse mortgages to those who are younger.)
- Own the property, or have a small balance remaining on your original mortgage.
- Have no federal debt delinquencies.
- Meet with a counselor about the reverse mortgage.
Repaying a Reverse Mortgage
As long as you live in your home as your primary residence, you do not need to make payments on your reverse mortgage (although you can). Once you have not been living in the home for a year, though, the reverse mortgage comes due. For many, this happens when long-term care is needed, or upon death.
The reverse mortgage is repaid with funds from the sale of the home. This is why the market value of the home â€“ and the equity in the home â€“ are such important considerations when getting a reverse mortgage. Unless the estate or heirs pay off the reverse mortgage, the home will have to be sold to repay the obligation.
Reverse Mortgage Insurance
It is important to note that a FHA reverse mortgage cannot be repaid for more than the amount of the home’s market value. This means that if home values plunge after the reverse mortgage is made, the lender can only take the amount the home is now worth â€“ even if more is owed on the home. This is why youâ€™re required to buy mortgage insurance on a reverse mortgage.
The FHA offers two different types of reverse mortgages, the Home Equity Conversion Mortgage (HECM) and the HECM Saver. The HECM Saver reduces the amount of mortgage insurance you pay up front at closing but also puts a lower limit on the amount you can borrow relative to the value of your home.
It is important to research the pros and cons of reverse mortgages before making the decision to borrow against your home. You should read more about the benefits of reverse mortgages for seniors as well as reverse mortgage disadvantages.
What are your thoughts on reverse mortgages? Leave a comment!
This article was originally published October 1, 2010.
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