Here are the four most common question you should ask when considering a reverse mortgage as an alternative option for your financial planning.
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A reverse mortgage is a loan that allows qualified homeowners who are age 62 or older to take part of their home's equity as cash, either as a line of credit, or monthly or lump sum payment, or combo of a credit line and payments. But, unlike a standard mortgage loan, it requires no repayment until the borrower no longer occupies the residence. Borrowers with reverse mortgages are still required to pay the real estate taxes, homeowners insurance, flood insurance, and association dues.
With careful planning, reverse mortgages can be used as a way to supplement other retirement income. Reverse mortgages also can be used to purchase a home if you are able to come up with the difference in cash from the proceeds of the reverse mortgage loan and the purchase price of the property.
The major source of reverse mortgages has been the one insured by the Federal Housing Administration (FHA) called the Home Equity Conversion Mortgage program (HECM). An HECM is the only reverse mortgage that's insured by the federal government, and HECMs are only available through an FHA-approved lender.
Non-HECM reverse mortgages are available from other lenders, banks, or credit unions. The main benefit of using a non-HECM lender is that they offer reverse mortgage loans in amounts higher than the limit set by HECM lenders. However, they can be significantly more expensive than HECM loans and they are not insured by the federal government.
Homeowners who are over the age of 62 and have either paid off their home loan or have a very small balance -- which must be paid off upon closing of the reverse mortgage – are eligible. That's why reverse mortgages are almost always done after retirement to supplement the borrower's post-retirement income. Additionally, the property must be HUD-approved and you must live in the home. Eligible property types include single-family homes, 1-4 unit properties, some condos and manufactured homes.
Reverse mortgages work similar to how annuities work -- they are based primarily on life expectancy of the borrowers. The maximum amount that can be received from a reverse mortgage loan depends on the following factors:
The older the borrower, the more home equity available. Also, the lower the interest rate will also increase the amount of funds that a borrower may receive from the loan. Once the amount has been established based on the above factors, you must select your method of payment from the following options:
While there are many payment options, the Consumer Finance Protection urges borrowers to consider the monthly payment or line of credit options over the lump-sum cash payout. Line of credit options provide more long-term security for retirement. Typically, non-HECM reverse mortgages offer fewer income options.
When the property is sold or no longer used as a primary residence, the cash you received in a line of credit or payment, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
The cost of a reverse mortgage loan will vary by lender, and the actual costs is largely dependent on the income option you select. But the main costs include:
When looking for a lender for your reverse mortgage, be sure to compare these costs to understand which loan makes financial sense for you. You can find these numbers by looking at the total annual loan cost that you will receive from each lender.
Tapping into your home equity in your retirement years is a big decision and can be risky. If you're age 62 or older and considering a reverse mortgage, be sure to talk to your financial planner to see if this type of loan would help you supplement your retirement income. And be sure to get quotes from multiple lenders to find the loan that makes financial sense for you during your retirement. Learn more about Home Equity Conversion Mortgages (HECM) for Seniors here.
Written by
Rhonda Friberg
08.05.2015
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