Reverse Mortgages | Helping With A Smooth Retirement
Most people are fully aware of the basics of how mortgages work and what they do. What is often less clear is how reverse mortgages work. Reverse mortgages have become very popular in recent years as they have provided a supplementary source of income for those in retirement. Essentially, a reverse mortgage allows you to turn the equity (i.e., the value you own) in your home into cash. Below we will look at how reverse mortgages work and some of their benefits and drawbacks.
How Does A Reverse Mortgage Work?
How Does A Reverse Mortgage Work?The most popular reverse mortgage is called a Home Equity Conversion Mortgage (HECM) which is insured by the Federal Housing Administration (FHA). An HECM mortgage is only available through an FHA-approved lender. Like a regular mortgage, a reverse mortgage is a loan given to you up to the value of the equity in your home. However, unlike a standard mortgage, instead of paying your lender in monthly installments, the lender pays you. Taxes, insurance, and fees associated with the house, however, will still need to be paid by the homeowner.
You can receive this payment either as a lump sum or in regular installments. While you or your heirs will continue to own the home, the reverse mortgage will need to be paid back to the lender once the home is sold. Keep in mind that reverse mortgages are only available to those who are 62 or older.
Use Reverse Mortgage As Supplemental Income
Reverse mortgages have big advantages for those who qualify. Many retirees struggle to pay for basic necessities and medical care, despite often owning their homes outright and thus sitting on a major financial asset. This is a situation referred to as being “house rich, but cash poor.” With a reverse mortgage, retirees can use the equity in their home as a source of income, thus allowing them to pay for expenses that may be a struggle to meet otherwise.
Are There Any Drawbacks To Reverse Mortgages?
Reverse mortgages are not without risks. You will still need to pay for insurance and taxes on the home and if you fall behind on those payments then your lender could cancel your reverse mortgage and even foreclose on your property. Also, the compound interest associated with a reverse mortgage can quickly eat into the equity in your home, making it difficult to refinance.
Reverse mortgage terms and conditions can be complex and difficult to understand, which is why it is somewhat unsurprising that the Consumer Financial Protection Bureau (CFPB) received 1,200 complaints about reverse mortgage products between December 1, 2011 and December 31, 2014. Fortunately, rules have been tightened in recent years, which should help reduce the risk. Additionally, you will have to talk to a HUD-approved counsellor before taking out a reverse mortgage.
Finally, if you do take out a reverse mortgage ensure that you inform your family you are doing so. Your children may expect that once you pass on your house will be given to them. But if you have a reverse mortgage then the house may need to be sold and most of the proceeds will have to be given to the lender to pay off the reverse mortgage.
Documents Required For A Reverse Mortgage
As mentioned, rules surrounding reverse mortgages have gotten tighter in recent years and you will now have to pass a financial assessment in order to qualify. To pass the financial assessment you will need to provide a current tax statement, proof of income (such as from a pension or retirement fund), and bank statements going back two to three months.
You will also need to provide a certificate showing that you attended a HUD-approved reverse mortgage counselling session. To prove your age and eligibility, a driver’s license or state-issued identification card will need to be provided. You will also need your Social Security Number or Medicare card and you will also have to provide a copy of your most recent Homeowner’s Insurance Declaration Page.
Current Reverse Mortgage Interest Rates
Keep in mind that interest rates on reverse mortgages are usually higher than on standard mortgages. Furthermore, they are generally compounding. Typically, your home’s equity will be used to pay that interest once your home is sold, but that means you or your heirs could lose a lot of the value in your home to interest.
Be careful when shopping around for reverse mortgages. Salespeople can be aggressive and may promise that a reverse mortgage will solve all of your problems. Do your research and talk to a counselor to find out how much the interest rate on a reverse mortgage will actually cost you.
Reverse Mortgage Hidden Fees
Reverse mortgages are a bit notorious for their hidden fees. You will be required to pay the fees that are standard with any mortgage, such as a title search, inspection, survey, credit check, appraisal, and recording fee. Additionally, you will have to pay an origination fee, which is based on your home’s value, and a mortgage origination premium. While some fees are non-negotiable, others you can certainly try to get your lender to lower.
Reverse Mortgages Frequently Asked Questions
If I have no kids, what happens to my reverse mortgage when I die?
Just like the scenario in which children are involved, the lender will repossess the house and sell it in order to repay the remainder of the loan. Be aware, however, that if you have a will in which the house will pass to someone else, they may "inherit" the balance of your debt as well if they want to claim the property.What can I use the money for? Are there any restrictions?
The mortgage is your money and can be used for any purposes, including the repayment of the loan itself. If the need for the reverse mortgage dissipates, check with the lender to ensure there is no penalty for prepayment, or early repayment of the note.What are the alternatives to a reverse mortgage?
If you own your home, or even own at least half of it (based on your current mortgage), a simple home equity loan may be a better choice. There is no age restriction on a home equity line of credit, and it need not be designated for any specific expense. Rates for equity loans will vary greatly, and of course it is the due diligence of the consumer to shop for the best loan.Advertising Disclosure: This post may contain promotional links. Watch the Review may be compensated if you use these links.
