In the last few years, there has been much talk about reverse mortgages. Although the program started around 1999, it has grown in popularity.
What is it?
A reverse mortgage allows older homeowners to pull equity from their home and convert it into credit or cash. Unlike a home equity loan or second mortgage, a reverse mortgage doesn’t require you to make payments on the withdrawn equity. You also are not obligated to submit repayment unless you move out of your home, sell it, or fail to meet any other obligation outlined by your mortgage.
A reverse mortgage has come in handy for many homeowners affected by the 2008 market crash because it has allowed them to use their equity as cash for other needs such as unexpected medical expenses or home improvement. However, there have been a number of scams and negative articles related to reverse mortgage as well.
Let’s walk through some of the most pertinent information you need to know before deciding on a reverse mortgage.
You must be 62 years and older in order to qualify for a reverse mortgage and the property must be your main residence. Check the balance on your mortgage because it must be low enough that the proceeds of your reverse mortgage will cover the remaining balance.
Your income or credit will not be taken into account because you will not be making payments on this mortgage. If you have an open or pending bankruptcy, court approval may be required before moving forward with closing the reverse mortgage. Reverse mortgages are only good for FHA standard property types, which are most 1-4 family residences and approved condos.
You can either go through the FHA/HUD for a reverse mortgage or a private financial institution. Their program is called The Home Equity Conversion Mortgage. If you chose to go through the FHA for a reverse mortgage, you will be required to take a counseling course at no to low cost to you.
The course is to ensure that you fully understand the financial and legal responsibilities associated with getting a reverse mortgage. It’s a great opportunity for you to ask any and all questions before signing anything.
Lending Payout and Limits
Three factors play a role in determining your loan size: your age, the interest rates your select and the value of your home. Lending limits vary on institution (and county), but federally cannot exceed $625,500.
If you have a high-valued home, you can access something that is called a “Jumbo” loan, allowing you to have a high loan amount than $625,500; however as of right now, the FHA will not be able to insure the loan and you may pay higher fees.
According to the HUD website, you can receive your loan in five different ways:
- Tenure: equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term: equal monthly payments for a fixed period of months selected.
- Line of Credit: unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
- Modified Tenure: combination of line of credit and scheduled monthly payments for as long as you remain in the home.
- Modified Term: combination of line of credit plus monthly payments for a fixed period of months selected by the borrower
Unlike a standard mortgage in which taxes and insurance are covered by an escrow fund, the homeowner pays out taxes and insurance for a reverse mortgage. You must keep current in order to avoid defaulting on your reverse mortgage.
The money you receive from your reverse mortgage is not taxable and your public benefits (Social Security, Medicare, etc) will not be affected by it.
The loan ends when the borrower dies, moves away or sells the home. At which point, the borrower (or heirs in the event the borrower is deceased) can refinance the home or turn it back over to the lender. There is a year limit to make a decision.
There is a high upfront cost associated with acquiring a reverse mortgage. The upfront cost depends on the value of your home and a certain percentage is arranged. For more information on the upfront cost you can contact the FHA.
Another criticism has been the interest rate. If your mortgage is not paid off completely, you can use your reverse mortgage to pay the reminder (which is why you have to have acquired a certain amount of equity to qualify); however, the reverse mortgage interest is rolled into your mortgage payment.
If you aren’t meticulous, you could be paying more on your mortgage and less on what you needed the extra money for in the first place.
Lastly, the popularity of reverse mortgage has skyrocketed from 2008 to now, creating an opening for scammers. With any account creation, but sure to verify the source that is offering you a reverse mortgage and don’t sign anything you don’t understand.
The best way to avoid being scammed is to visit the FHA/HUD website. It’s a great start to learning more about this type of mortgage.