If you’re over sixty-two, and you’re looking for money to pay off your existing mortgage, finance home improvement, health care expenses, or supplement your retirement income, you may want to consider taking out a reverse mortgage. This allows you to convert a portion of your real estate equity into cash without having to sell it or pay additional monthly bills.
There are several types of reverse mortgages. The first is a single purpose reverse mortgage which is the least expensive option. This can only be used for one purpose which is specified by the government or not-for-profit lender. Homeowners with low or moderate incomes can qualify for this loan. There are also home equity conversion mortgages or HECMs backed by the US Department of Housing and Urban Development and reverse mortgages backed by the companies that develop them.
HECMs and reverse mortgages are more expensive than traditional home loans and the upfront costs are high. You can consider this, especially if you are planning to stay in your home for a short time or to borrow a small amount. These loans are widely available, have no medical or income requirements and can be used for any purpose of your own.
Before applying for HECM, you should consult an independent consultant from a government-approved housing advising agency. Many of the reverse mortgage lenders also require you to give advice. He or she will explain the financial implications, expenses, and alternatives of HECM and should be able to help you compare the costs of different types of reverse mortgages. How much you can borrow on a HECM or reverse mortgage depends on a few factors such as your age, type of mortgage, appraised value of your home, and current interest rates. In general, the older you get, the more credit you have in your home, and the less you owe, the more money you can have.
Here are some reverse mortgage facts that you should be aware of:
1. Generally, lenders charge a mortgage insurance premium (for federally insured HECMs), origination fees, and other costs of closing. They can also charge a service fee for the term of the mortgage. HECM Reserve Mortgage origination fees are currently mandated by law.
2. While it is true that some reverse mortgages have fixed rates, most have variable rates that are linked to a financial index and are likely to change with conditions in the market.
3. The amount owed in a reverse mortgage grows over time. Interest is calculated on the outstanding balance and added to the amount you owe each month. This means that your total debt decreases as the loan money is paid into the interest accrued on the loan.
3. A reverse mortgage can eat up all or some of your home equity and leave some assets to you and your heirs. Most of these mortgages contain an illegal clause that prevents you or your property from owning more than it is worth.
4. You will be responsible for insurance, property taxes, fuel maintenance, utilities and other expenses since you retain ownership of your property. If you do not pay these amounts and maintain the condition of your home, the loan may become due and payable.
5. If you own a home with a higher value, you may be able to get a higher loan but the higher amount you borrow also means higher costs. The key to identifying the differences between a HECM and a home equity loan is to do a side-by-side comparison of their benefits and expenses.
6. You have the right to cancel the mortgage transaction within three days for any reason minus a financial penalty. You should write a letter to the lender by certified mail and ask for a return acknowledgment or receipt, this will allow you to document that the lender received it on the date listed. Keep copies of your correspondence. After canceling, the lender has twenty days to return any amount you paid for the financing.
Keep in mind that no matter what type of reverse mortgage you are considering, you must understand all of the terms that may make the loan due and payable.