Putting your home in REVERSE
Understanding a reverse mortgage and the pros and cons
A reverse mortgage is a financial product for homeowners 62 or older have built up equity in their home. Equity is defined as the value of your home less any liens attached to the home. For those who qualify, the amount of equity in the home can be used to supplement retirement income. A reverse mortgage is also known as a HECM or home equity conversion mortgage. This type of mortgage product does not require any monthly payments. Borrowers for this type of product must still pay their own taxes and insurance and this home must be occupied as their primary residence.
To understand what a reverse mortgage is, it is best to compare it to a traditional mortgage. In a traditional mortgage, the borrower makes forward payments monthly. A certain portion of that payment goes to interest and to principal. This method allows for a very gradual reduction in the mortgage balance and as the balance decreases, the borrower earns equity in the home. With a reverse mortgage, the borrower receives payments from the lender and does not need to make payments back to the lender. The mortgage grows over time as interest accrues on the money received. The equity gradually diminishes on the home.
The basic similarity between a forward or traditional mortgage and a reverse mortgage is that the money always must be repaid. A reverse mortgage can be paid back at any time. Usually it is paid off when the home is sold. Reverse mortgages are made the same way a traditional one is. A lender will not loan more money than the home is worth and there are very strict guidelines that must be met to be approved. Careful consideration of the housing market and amount of equity is given during the approval process. If the home is sold and there is still equity, the homeowner keeps that equity. If the market experiences a down turn and there is a negative equity, the money must be paid back.
Reverse mortgages are regulated by the Federal Housing Authority (FHA) and they are backed by the federal government so those who take on a reverse mortgage do not have to worry about the money being paid to them.
To be eligible for a reverse mortgage a borrower must be 62 years or older, you the home must be your primary residence, the home must be a condo, single family residence, or a multi-family up to 4 units or manufactured housing on its own foundation, the home is free of liens or the lien is very small, and the home is in good condition prior to applying for the mortgage.
Borrowers must go through extensive mortgage counseling by a HUD approved counselor and extensive financial assessments will be done to ensure that he borrower can make the insurance, property taxes, condo fees, homeowner association fees and basic housing maintenance to protect the bank’s asset. Reverse mortgages work the same way as traditional mortgages in that borrowing is dependent upon interest rates.
If approved, borrowers receive many options for receiving their money. They can take out a line of credit, take a lump sum payment or receive monthly payments. Switching methods after approval require an additional small fee. The government regulates the fees involved with this mortgage. The costs associated with a reverse mortgage is 2 percent of the loan amount for an up-front mortgage insurance premium. You will pay 5 percent annually for this mortgage insurance also. Lenders can charge varying rates of origination for this mortgage so doing your homework is important to decide who offers the best reverse mortgage fees. Not every lender is qualified to make this type of loan and there are many sharks in the water. Changes have recently been made to reverse mortgage guidelines so checking with your local bank or a trusted advisor is the first step if you are thinking of this product for you.