For most retired homeowners, the reverse mortgage is a source of additional income which lets them tap into their home equity. The procedure has also become easier and safer for people who are thinking about applying. But there are various issues to consider — such as possible dangers — when thinking about a reverse mortgage.
What is a Reverse Mortgage?
A reverse mortgage also referred to as the Home Equity Conversion Mortgage (HECM) is home crediting choice for homeowners 62 or older who’ve gathered home equity and wish to utilize this as a supplemental retirement income. Unlike a traditional forward mortgage, there are no monthly mortgage obligations for a borrower as with a conventional mortgage. Instead, the lender makes payments to the debtor.
Reverse mortgages are guaranteed by the Federal Housing Administration (FHA). This guarantee makes sure that the homeowner will receive all of the payments they’re eligible for, also protects the debtor from paying more than the house costs. In situations where the debt exceeds the value of the house, that the FHA covers the gap.
What are the benefits?
Reverse mortgages have been planned as a way to assist retirees with limited income use the accumulated wealth in their houses to pay for basic monthly living expenses and pay for healthcare. But, there are no limitations concerning the way the reverse mortgage proceeds may be used.
The loan generally doesn’t need to be repaid until the last surviving homeowner dies or moves from the house. After this, the house is sold and the profits from this sale are used to repay the reverse mortgage.
How Do I Qualify?
You may be eligible for a reverse mortgage if:
- You’re 62 or older.
- You own your house and use it as your main residence.
- Your house is a single-family or multi-family (up to 4 families), or manufactured home, or an authorized condo.
- You own your home (without any debt) or only have a small amount left to pay on your present forward mortgage.
- Your home is in good condition.
All considered borrowers must also undergo a financial assessment to be eligible. This evaluation makes sure the borrower can pay for:
- Property taxes
- Homeowner’s insurance
- Basic home maintenance
- Homeowner’s Association (HOA) fees if suitable
The Department of Housing and Urban Development (HUD) also requires all potential reverse mortgage borrowers to accomplish a counseling session. This HUD-session must cover the advantages and disadvantages of carrying out a reverse mortgage granted your particular financial and personal conditions, like how a reverse mortgage can impact your eligibility for Medicaid and Supplemental Security Income. The counselor must also examine the various ways by which you may get the proceeds.
Anything I should consider?
A reverse mortgage isn’t the right option for everybody. You still need to fulfill certain requirements, and failing to fulfill them will make it possible for the creditor to foreclose. A reverse mortgage is not your option if:
- You want your heirs to inherit your house.
- You live with someone.
- You’ve got medical bills.
- You may move shortly.
- You can not manage ongoing costs, such as house maintenance, property taxation, or homeowners’ insurance.
As a reverse mortgage borrower, you’re expected to stay in the house and care about it. If the house falls into decay, the lending company will not have the ability to cover the entire amount it’s extended to the debtor. In the event you do not pay your property taxes, the regional tax authority can grab the home. If you do not have homeowners insurance and there is a home fire, then the lender’s security is ruined. Remember, the lending company will enforce these requirements to secure its interest in the house.
What financial options are out there?
Apply for a reverse mortgage with different organizations to determine which has the cheapest prices and charges.
The lump-sum mortgage providing you all of the income at once if your loan closes is the only that has a predetermined rate of interest. Another five choices have adjustable rates of interest. Along with one of those base prices, the creditor provides a margin of 1 to 3%. Interest compounds over the life span of the reverse mortgage and your credit rating doesn’t influence your reverse mortgage rate or your ability to be eligible.