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Reverse Mortgage Loans
Reverse mortgages are one of the best-kept secrets in the mortgage world. Insured by the Federal Housing Administration, these loans allow borrowers ages 62 or older to receive payments taken out of the existing equity in their home.
That’s right–with a reverse mortgage, you can receive your mortgage payment! You can either receive the funds as a lump sum, a fixed monthly distribution, a line of credit, or a combination. The amount of funds you are eligible for depends on your age, the value of the home, your interest rate, and how much equity you currently have in the home. Reach out to us for more information. You can use these funds for anything–most often it’s to supplement retirement income and cover living expenses without having to take withdrawals from a retirement account.
Because you’re tapping more and more into your home’s equity, the balance of a reverse mortgage increases over time. You are charged interest on the proceeds that you receive, and the interest compounds over the life of the loan (not charged monthly). The loan is most often paid back when the home is sold. In addition, you are paying mortgage insurance to the Federal Housing Administration to protect your home from going upside down in value–thus you will not ever owe more than the home is worth.
There are several misconceptions floating around about reverse mortgages. Here are some common questions:
How do I qualify?
You must own a home, be at least 62 (or your spouse must be at least 62 and be on the loan), and have enough equity in your home. You must also show you have the financial capacity to pay property taxes and other costs associated with the property.
Do I have to own my home free and clear?
No, you can still use a reverse mortgage on your home–you would just use the reverse mortgage to pay off the existing mortgage. This would lower the amount of equity you would directly have access to.
Does a reverse mortgage affect my social security or other distributions?
Are there any cons to a reverse mortgage?
A reverse mortgage does have upfront work. The borrower must take a counseling course to understand what a reverse mortgage is and how it works. There are also upfront costs paid to the FHA equal to 2% of the home’s value, so if you plan to move in the next 2 or 3 years it may not be the most cost-effective option. Each year you will be charged a fee of 0.5% of the current mortgage balance.
In a reverse mortgage, you are responsible for paying the taxes, insurance, association dues, and any other property-related costs. Some lenders will allow you to set aside these funds from your proceeds, and they will pay these fees on your behalf.
What is a maturity event?
A maturity event is an event that requires your reverse mortgage to be paid in full. Most commonly this happens when all borrowers have passed away or when the borrowers sell the home. If one spouse passes away, the living spouse can continue living in the home and this would not affect the reverse mortgage. You are able to pay off your reverse mortgage at any time, not just at a maturity event.
What if heirs would like to purchase the home after the borrower passes away? How much would the heirs pay?
Heirs can buy the home for 95 cents to the dollar of the appraised value of the home if there is no equity left in the home. If there is equity in the home, they can payoff or refinance the mortgage.
If you have further questions on reverse mortgages, please give us a call! We want you to be educated on all your options.