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What is a Reverse Mortgage?

It is likely that you have seen the term "reverse mortgage" before. You may have even wondered, "What is a reverse mortgage?" anyway? Today we are going to answer that question.

Like a traditional mortgage, a reverse mortgage loan enables homeowners to borrow money with their home acting as the loan's security. Any time you take the loan, your name remains on the title. You are not required to make monthly repayments for the reverse-mortgage, and if you decide to move out of the house, the loan is repaid.

Fees and interest are added to the loan balance every month, making it grow. The amount that the homeowner owes increases instead of decreasing over time. As this happens, the equity of your home reduces. The loan balance keeps rising and will eventually need to be paid back, usually by selling the home. Essentially, what you are doing is simply drawing down the equity in your home without having to sell it first.

As you consider what a reverse mortgage is, here is what you should think about when deciding if a reverse mortgage is right for you:

  • There is an origination fee charged and closing costs. Service fees are also charged throughout the mortgage.
  • As you obtain money using the reverse-mortgage, the interest gets added onto the balance, and the amount that you owe increases as interest adds up over time.
  • The interest rates may also change over time, and the loans require that you take the loan as a single amount at closing.
  • These mortgages' interest does not get charged on income tax until it has been partially or fully paid.
  • You still pay for property taxes, insurance, maintenance, and utilities while you have the reverse-mortgage. If you fail to pay these maintenance costs, your lender might ask for repayment. You will also be required to provide a financial statement when applying for the mortgage.
  • If you had signed off on a loan without your spouse participating, they might keep on living in the home after you die, provided they pay taxes and insurance.
  • Reverse-mortgages are known to use up your home equity, which leaves less assets for the family. Most of the mortgages have a non-recourse clause. It dictates that you cannot owe an amount greater than the home’s value once the home is sold due to the loan being due.

Types of Reverse-Mortgages

There are three unique types of reverse-mortgages and knowing how each one of them works is useful. It can enable you to make the right decision on the format that will match your needs best.

Single-Purpose Reverse-Mortgages

These are the most affordable options offered by local government agencies, state, and non-profit organizations. However, they are not available in all places and can only be used for a single purpose specified by the lender. For instance, the lender might decide that you will only use the loan for home repairs, improvements, and property taxes. Homeowners that have low and medium-income qualify for such loans.

  • Proprietary Reverse-Mortgages

These are company-backed private loans provided by the home developers. A high-value home gives you access to a more significant loan advance, and this ensures that you can qualify for more funds even with a small mortgage.

  • Home Equity Conversion Mortgages (HECMs)

These are federally-insured mortgages that have the support of the government. They can be used for all purposes, but they are known to be costlier than traditional loans. Their upfront costs also tend to be high, and the amount you can borrow depends on factors like:

  • Age
  • The type of reverse-mortgage you choose
  • The appraisal home value
  • Interest rates and the results of a financial study

Before applying for this type of loan, you must consult a counselor for the loans' costs and their financial implications to be explained. You also need to have possible alternatives explained to you. The counselor will also help compare the costs associated with different reverse-mortgages and how fees, charges, and payment options affect the loan's total value over time.

A HECM does not have specific income requirements, and the lenders are required to carry out a financial assessment when choosing whether they will approve or deny your loan. The lender could request some set-aside funds for paying insurance and homeowner taxes from the assessment results. Several payment options exist:

  • A single disbursement
  • A term option that provides cash advances of fixed amounts for a given time
  • A tenure option with fixed cash advances for the duration you live in the home
  • A credit line that expires on reaching a given amount
  • A combination of line of credit and monthly payments

This loan generally provides access to larger amounts of the loan at a lower accumulated cost. You will, however, still pay taxes and insurance on the loan and maintain your home. There is also a limit on the first-year limit, known as the initial principal limit.

Searching for a Reverse-Mortgage

Do your research while considering a reverse-mortgage. Decide on the type of mortgage that is right for you and compare their terms, fees, and options. Look around for different lenders and learn everything you can before consulting with the lender. This enables you to be well informed before getting the loan, and you get to know the Total Yearly Loan cost for the mortgage option you select. If you need help finding a lender, please do not hesitate to ask us...we can find someone suitable to your needs.

Your Right to Cancel a Reverse-Mortgage

Typically, you have three business days after closing the loan to cancel the deal without incurring a penalty. This is your right of rescission, and the lender should be informed in writing. Also, keep communications between you and the lender. Within 20 days of canceling, the lender will refund you any money you had paid for the loan's financing.

Getting a reverse mortgage is not a decision that should be taken lightly. Please discuss it with your family and advisors to make sure it makes sense for your financial goals. It can be a powerful tool, but isn’t right for everyone. If you have questions or need guidance, please contact us and we will be happy to help you make a sound decision.

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