What is a reverse mortgage?

A reverse mortgage can give senior homeowners the funds they need to help cover their living costs. While this may sound like a good deal, there’s a lot to consider before taking the plunge. Here’s a look at how reverse mortgages work, who’s eligible, and who should (and probably shouldn’t) get one.

Reverse mortgages, he explained

A reverse mortgage is a type of loan that allows you to “tap your home equity.” Kiplinger explain Let’s say you’ve put a lot of money into your home through mortgage payments, either you own it or you’ve paid off most of the mortgage and therefore have equity. If you are planning to sell your home and downsize, that equity comes in very handy. But if you plan to stay in your home, as many seniors wish to do, having your net worth tied up in equity can be limiting. That’s where reverse mortgages come in: the borrower already owns the home and is borrowing against it while retaining title and ownership of the home. Think of it as “a conventional mortgage where the roles are reversed,” he explains Forbes. The bank will give you money up front, and then you’ll pay back the amount borrowed (known as the principal), plus interest.

The difference between a traditional mortgage and a reverse mortgage is that the borrower will not pay interest during the term of the loan. Instead, principal and interest will come due all at once at the end of the loan term. Because of this delayed repayment date, reverse mortgage loans are often not repaid by the borrower; the borrower’s heirs often sell the property to pay off the loan after the borrower moves or dies.

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Reverse mortgages are most commonly issued through government-insured programs, with the most popular type being the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration. Private lenders may offer reverse mortgages, but they are not federally insured and are more likely to expose the borrower to scams, because Forbes.

Who can get a reverse mortgage?

They are only available to owners who are at least 62 years old. Borrowers have to meet other requirements, according to the Consumer Finance Protection Bureau. They must:

  • they live in the house they are borrowing from
  • own the home or have a low mortgage balance, which they will have to pay when they close on the reverse mortgage
  • owes no federal debt
  • keep your house in good condition
  • Get advice from a reverse mortgage counseling agency approved by the US Department of Housing and Urban Development (HUD)

There is also an application process. The bank will want to make sure you have enough equity in your home and that you have enough funds to continue paying costs like property taxes, homeowner’s insurance, homeowner’s association fees, and general property maintenance.

How much can you borrow with a reverse mortgage?

This depends on interest rates, your age, and the appraised value of your home or HECM mortgage limit, whichever is lower. agree with Kiplinger“[generallytheolderyouarethelowertheinterestrateandthehigherthehousevaluethemoremoneyyou’llbeabletotap”Notethatit’snotpossibletotapalloftheequityinyourhome[xeneralmentecantomaiorsexasmenorseráotipodeintereseecantomaiorsexaovalordavivendamáisdiñeiropoderásaproveitar”Teñaencontaquenonéposibleaproveitartodoopatrimoniodasúacasa[g[enerallytheolderyouarethelowertheinterestrateandthehigherthehousevaluethemoremoneyyou’llbeabletotap”Notethatit’snotpossibletotapalloftheequityinyourhome

You can receive the funds as a single lump sum, through monthly payments, or through a line of credit. You also have the option of using a combination of these methods.

What are the costs involved?

There are a number of notable costs associated with reverse mortgages:

  • Mortgage insurance premiums: For federally backed reverse mortgages, there is an initial mortgage insurance premium of 2 percent and an annual premium of 0.5 percent thereafter, according to Forbes.
  • Origin fee: In addition, borrowers may pay a loan origination fee. According to HUD, lenders can charge “the greater of $2,500 or 2 percent of the first $200,000 of your home’s value plus 1 percent of the amount greater than $200,000.” These fees shall not exceed $6,000.
  • Service fee: Lenders may also charge a fee over the life of the loan for servicing, which may include tasks such as sending bank statements and disbursing loan proceeds. This fee will not be more than $30 or $35 per month, depending on how interest is charged on the loan.
  • Charges to third parties: Other costs may add up, such as fees for an appraisal, a title search, title insurance, a credit check, or a recording fee.
  • Interest: The interest rate of a reverse mortgage can be fixed whether a lump sum or variable amount is contracted. Variable rates are based on a financial index, with a margin of one to three percentage points added for the lender, according to Investopedia. You only accrue interest on the amount disbursed to you, not on unused funds. Still, since you don’t have to pay back the loan while you stay in the home and keep up with taxes and other costs, the interest can add up significantly over time.
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The costs are usually rolled into the mortgage, meaning borrowers won’t have to pay them out of pocket, although this reduces the loan amount available to them. And the costs can certainly add up. According to LendingTree, “reverse mortgages are more expensive than other types of home loans.”

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Should You Get a Reverse Mortgage?

To find out if a reverse mortgage is right for you, “start by thinking about what you plan to do with the proceeds.” Kiplinger he says If, for example, you want to stay in your home as you age rather than move into assisted living, a reverse mortgage might make sense. You may also consider a reverse mortgage to help cover costs during a market downturn or if you need additional income during retirement.

If you have heirs you want to inherit your property, however, you may want to think twice, LendingTree explains. The same is true if you have family members living with you and need to stay in the home after the reverse mortgage term is over. A reverse mortgage may also not be the right choice if you plan to move soon or if your health is uncertain.

There are other potential disadvantages. For example: You could face foreclosure if you don’t keep up with taxes, insurance, or maintenance; you could deplete all the equity in your home, making it unavailable later; you may need to sell your home to get out of the loan; and your principal will continue to increase over time as installments and interest are added to the loan.

You’ll want to weigh the pros and cons before proceeding. While a reverse mortgage can help you stay in your home longer, bolster your retirement funds and pay off debt, it’s also important to consider the whole financial picture.

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