Reverse Mortgages Review
How to Choose a Reverse Mortgage
A reverse mortgage is a good way for seniors to tap into some of the equity they've accrued on their homes. How does a reverse mortgage work? Think of it as a loan that converts home equity into cash. It’s a loan you borrow against the equity of your home that doesn't have to be repaid until you pass away or move out. In order to be eligible for a reverse mortgage you must be over 62 years old and either own your home or have a low enough balance that the remaining mortgage can be paid off with the proceeds of the reverse mortgage. Three of the top reverse mortgage lenders are American Advisors Group, Liberty Reverse Mortgage and Urban Financial of America.
The benefits of a reverse mortgage are that it allows you to remain in your house while getting another income stream that will allow you to pay for medical care or just to enjoy your golden years. A reverse mortgage can provide a line of credit for use in an expensive home repair. Unlike a regular mortgage or loan, you do not make payments on a reverse mortgage. It must be repaid, either when the borrower dies or leaves the home, and this is often done by selling the home. The amount due at repayment cannot exceed the valuation of the home.
Is a Reverse Mortgage Right for You?
There are many risks with reverse mortgages to be aware of. Reverse mortgages are confusing products, and many lenders make them sound like they have no risks. There are high costs associated with them, including mortgage insurance, closing costs, valuation fees and other fees that lenders are not always up front about. While these fees are generally financed into the reverse mortgage and aren't paid until the loan is paid off, they can still can seem surprising and disappointing when the payout of the reverse mortgage is not as large as it might have originally seemed.
You must continue to pay property taxes and home owners insurance on your home. Even with the money from a reverse mortgage, it can be hard for some to keep up with these bills or remember to pay them. If they aren't paid, it can result in default and in some cases foreclosure. Often, the repayment of a reverse mortgage can come as a surprise to heirs or a spouse who wasn't a co-signer. It's important to discuss this with your spouse and heirs so there can be a repayment plan when you pass on or leave the home.
Federal regulations mandate that people considering reverse mortgages take a mandatory counseling course to educate themselves about reverse mortgage pros and cons. Reverse Mortgages are complicated financial products so it's important you understand the risks associated with them. As of April 2015, new regulations will require those who wish to take out a reverse mortgage undergo a more strenuous financial assessment to see if they qualify. This financial assessment is in addition to credit checks that are already mandatory.
Reverse Mortgages: What Should You Look For?
Types of Loans
The most common use of reverse mortgages is to get another source of income. This new income can come in several forms: a line of credit, a lump sum payment or a monthly payment. It should be noted that only 60 percent of the total disbursement can be activated within the first year of the reverse mortgages. This prevents a borrower from tapping out their equity and going into foreclosure. There are a few subtypes of these loans, including a reverse mortgage for purchase, which allows you to use the proceeds toward the purchase of a new home. There is also a Single Purpose loan designed for seniors with low or medium incomes for the purpose of home repairs or improvements or for paying medical bills.
Other reverse mortgages are proprietary or jumbo reverse mortgages. These loans are for homeowners with high home values and are relatively rare. One advantage of a jumbo reverse mortgage is that they can exceed the legislated maximum amount of loan proceeds. After 2008, most lenders stopped offering jumbo reverse mortgages, but in 2014, Urban Financial of America launched a new jumbo reverse mortgage program in states with high home values, such as California, Hawaii, Florida and New Jersey.
Reverse mortgages are also known as Home Equity Conversion Mortgages or HECMs and are federally insured by the FHA. This means that if a lender goes under you still receive your payments and that you will not owe more than the property is worth. However, jumbo reverse mortgages are not federally insured and carry extra risk.
Interest rates vary depending on market conditions. Reverse mortgage interest rates can be adjustable or fixed. An adjustable-rate reverse mortgage starts with a rate set by the lender that remains set for a fixed amount of time. Later it can be adjusted based on the current index rate. A fixed rate has constant interest rate that doesn't change over the course of the loan. Interest rates on jumbo loans tend to be 1 percent to 2 percent higher than a traditional reverse mortgage. Interest only accumulates on the money you use, so if you choose a lump sum payout the interest will accumulate on all the money you receive, whereas with a credit line you would only pay interest on what you withdraw, beginning at the time of the first withdrawal.
Closing Costs & Fees
A reverse mortgage has no monthly principal or interest payments. It must be repaid when the holder of the reverse mortgage passes away or moves from the home. Reverse mortgages still have fees associated with them, including an origination fee, an initial mortgage insurance premium, title insurance, property appraisal and other third-party costs. The origination fee varies depending on the value of your home, but cannot exceed $6,000. These costs are financed into the loan, and so they aren't paid up front but when the loan is repaid.
Most lenders provide online calculators to help you figure out if a reverse mortgage is the right option for you. Reverse mortgages can provide you with another source of income if you're on a fixed income or want to get access to some of the equity your home has accumulated.