Reverse mortgages have risen in popularity the past few months, with Hollywood doing their fair share of marketing. This mortgage product catering to seniors – 62 or older – can be a good source of funds for those unforeseen medical expenses and daily costs of living not covered by Social Security or pension. For the seniors out there, what should you consider before or when getting a reverse mortgage? Preparing for retirement?
What is a reverse mortgage
A reverse mortgage allows you to tap into your home equity to receive payments from lenders. This mechanism makes it run reverse to traditional mortgages that require you to back your loan in monthly installments.
Now, the most popular reverse mortgage product on the market is that insured by the Federal Housing Administration. Also known as the Home Equity Conversion Mortgage (HECM), an FHA-insured reverse mortgage can be used for:
- Purchasing a home using the money from the reverse mortgage loan.
- Refinancing to get a lower rate or borrow more cash.
When do you repay the mortgage? It’s either when you move out of the property, die, or sell the home. Upon your death, your heirs will pay back whatever’s owed on the mortgage.
Another scenario is when you neglect to pay your property taxes and insurance and basically let the house fall into disrepair. Then the loan would go into default and might be foreclosed by the lender.
Of course, nobody wants those things to happen. Thus, it’s important to keep a few things in mind when contemplating a reverse mortgage. And what are these?
Need cash for your medical bills and other expenses?
What to consider
The minimum age to take out a reverse mortgage is 62 years old. In reverse mortgages, the age of the youngest borrower partly determines how much you can get from your reverse mortgage. This often leads some borrowers who are older than their spouses to leave their younger spouses out of the mortgage so they can get more out of their loan.
Speaking of non-borrowing spouse, he/she can continue living in the house even after the borrower’s death. Being the heir, he/she will now be responsible for the repayment of the reverse mortgage and the ownership of the house as well. It’s important to know beforehand if your spouse or whoever your legal heir is will have the financial capacity to repay your reverse mortgage. That way they can keep the home even after you have passed on.
Your equity, that is the market value of your home minus the outstanding balance of the mortgage, plays an important role in determining how much you can take out of your reverse mortgage. Ideally, whatever you owe doesn’t exceed how much your home is worth. And the more significant your equity is, the lower your interest rate will be.
Find out if you qualify for a reverse mortgage.
That’s why a reverse mortgage is suited for seniors who have paid down their mortgage loans or chipped off a substantial portion off their loan. Whatever that remains unpaid on your standard mortgage can be covered by a reverse mortgage, with the remaining proceeds be disbursed to you.
The beauty of a reverse mortgage is its flexibility when sending payouts to its borrowers. You have the option to receive cash from your reverse mortgage in the form of:
- Lump sum
- Periodic payments
- Line of credit
- Or, a combination of the three types
Take note that your payout option would depend on the type of interest rate you choose. A fixed-rate reverse mortgage has limits on the amount you withdraw, e.g. 10% of the principal limit. While, a variable-rate reverse mortgage can be disbursed as a line of credit or periodic payments.
Today’s low interest rates are a good motivation to take out reverse mortgages. Plus, as mentioned, your equity can help you avail of lower rates. For every payout option, there is a corresponding rate that may be relatively high or low.
Talk to our professionals to know more about reverse mortgages.
Specifically, a lump sum carries a higher interest rate because it is one of, if not the most, flexible payout options available. Scheduled monthly payments carry the least interest rate while a line of credit falls in between.
If you live in a home that is a: (i) single-family, (ii) two-four unit home, (iii) modular home, (iv) planned unit development, (v) a condominium unit, or (vi) a manufactured home and plan to stay in that home, then you can qualify for a reverse mortgage.
A reverse mortgage is even more handy if you use it to pay for property tax and insurance. Just be current on these obligations to avoid any problems in the future.
A reverse mortgage carries costs and fees typically associated with mortgages, including origination fees and closing costs. That’s why it’s necessary to occupy the home in order to recoup what you’ve spent on taking out the loan.
By being aware of these factors, you’d be more than prepared when you take out a reverse mortgage. For more information, don’t hesitate to speak to us.