You’ve finally made it to retirement and are ready to enjoy the good life. There’s just one problem---you would like to have more cash or savings to use for daily living expenses, travel, medical bills, home remodeling or other expenses now that your paychecks have stopped.
You might think about a second mortgage or home-equity line of credit, but you may not wish to take on monthly payments, or you may not have enough income to quality now that you’re retired.
You might want to join increasing numbers of seniors who are tapping into their home equity with a reverse mortgage. Demand for information on reverse mortgages has increased exponentially, according to AARP spokesperson, Bronwyn Belling.
What is a Reverse Mortgage?
A reverse mortgage is a special type of loan that lets you convert some of the equity you have in your home to cash. Unlike a home-equity line of credit or second mortgage, your income and credit history are not considered because you’re not responsible for making any monthly payments. You qualify if you are 62 or older, plan to continue living in your home, and have enough equity in your home to pay off any current mortgages or liens.
There are reverse mortgages for higher valued homes, but more than 90% of reverse mortgages today are Home Equity Conversion Mortgages (HECMs), insured by the U.S. government through FHA.
The cash you get from a reverse mortgage may be a lump sum or monthly payment, or access to a line of credit you may draw from as you choose. Money left in a line of credit with most plans will continue to grow. The amount you can get generally depends on the type of loan you use, the value of your home, your age and interest rates at the time you apply for the loan. The older you are and the lower the interest rates, the more money you’ll receive.
There are no restrictions on how you use this money. After first paying off any existing mortgage or lien, the remaining money can be used to fund a favorite dream or to relieve a financial burden. Just paying off your current mortgage can improve your monthly cash flow and increase your sense of security.
You always retain the title to your home and can stay there as long as you choose. You remain responsible for property insurance, taxes, and maintenance.
No payments are made on the loan until the house is no longer your primary place of residence. If you move in with a family member, go into a nursing home or pass away, the debt is usually repaid by using the proceeds from the sale of the home or refinancing the loan into a traditional mortgage.
Is a Reverse Mortgage Safe?
Federal legislation mandates several consumer safeguards in the form of standard and capped interest rates, fee limits, and advance disclosure of all costs and facts about reverse mortgages.
FHA requires anyone who wants a reverse mortgage to undergo advance counseling with an approved, independent counselor, usually in a single session in person or by phone.
Important Considerations
The upfront costs of getting a reverse mortgage can be viewed as high, and vary according to your situation and the type of loan you choose. Costs include origination fee, FHA mortgage insurance premium and other required closing costs. Most lenders allow these costs to be financed as part of the loan balance. In addition, interest and monthly servicing charges are added to your monthly loan balance.
However, you or your heirs are never required to repay more than the value of the home and any remaining equity always belongs to you. Since no payments are made until the loan is paid off, the loan balance increases over time. As a result, there will be less equity to pass on to heirs.
Is a Reverse Mortgage Right for You?
A reverse mortgage is a loan designed for people who want to stay in their homes. Many borrowers feel the positives of a reverse mortgage outweigh the negatives, especially when they know they can remain independent and live comfortably without depending on others. The cash from a reverse mortgage can provide security, choice, and financial peace of mind. |