If you have lived in your current home for many years, you may reach the point where you have made your final mortgage payment or you may be close to repaying the home. Congratulations – this is a major achievement on the road to home ownership.
Your home now represents pure equity. Funds that could prove useful to pay for unexpected major expenses, medical bills, or any type of financial emergency. But how do you get access to some of that hard-earned equity from home? These situations could be ideal for a reverse mortgage.
You may have heard the term “reverse mortgage”. But what exactly is it and why would you want to get another mortgage out of your home? Read on to find out.
What is a reverse mortgage?
A reverse mortgage is a loan that is based on the current paid-in value or equity of your home. Instead of doing one monthly mortgage paymentYour lender can use your equity to pay you a set monthly amount, provide a line of credit that you can draw on when needed, or pay you a flat rate.
While access to this money sounds great, it is important to understand how a reverse mortgage works to avoid any pitfalls.
How does a reverse mortgage work?
If you have one regular mortgageYou pay the lender every month so that you can eventually own your home in full. With a reverse mortgage, you get a loan that the lender pays you in. Reverse mortgages take some of your home’s equity and convert it into payments to you.
You will not have to pay back this loan until you move, sell the house, or die. If you (or your heirs) sell the home, the remaining amount of the mortgage loan will be deducted from the proceeds of the sale. The remaining balance from the sales proceeds will be returned to you or your heirs.
What can you pay with a reverse mortgage?
Here is a brief list of the expenses that you can pay with funds from a reverse mortgage:
- Medical debt
- Debt consolidation
- tuition fee
- Another home purchase
- Or you can use it as extra income
There are no set restrictions on how the money can be used. But that doesn’t mean you should run out and get one right away. Be sure to read the pros and cons to understand whether this financial instrument makes sense for your situation.
How do I qualify for a reverse mortgage?
Prepare to look for the right type of reverse mortgage that suits your situation. If you meet all of these requirements, a reverse mortgage may suit your needs:
- The lead borrower must be at least 62 years old – your spouse may be younger.
- You must own all of your home or just have a mortgage that you are the borrower of.
- You must use the proceeds of your reverse mortgage to repay the existing mortgage.
- The house must be your primary residence.
- You must be up to date on all property taxes, homeowner insurance, and other mandatory legal obligations (such as HOA fees).
- You must take a consumer education course led by a HUD-approved advisor.
- Your home must be well maintained and in good condition.
- The house must be a single-family house, a condominium, a town house, a house built after June 1976 or an apartment building with up to four units.
There are 3 types of reverse mortgages
Reverse purpose mortgages
These are offered by some state and local government agencies and nonprofits. For a one-time reverse mortgage, the lender specifies how the loan proceeds will be spent. For example, you may only be able to use the funds for property taxes or home repairs. This is the most affordable type of reverse mortgage, and low- and middle-income homeowners can often qualify.
Home Conversion Mortgages (HECMs)
HECMs are reverse mortgages supported by the Department of Housing and Urban Development (HUD). You can use the proceeds of an HECM for any purpose. This type of loan is more expensive than a single-purpose reverse mortgage or a traditional home loan, including high loans Closing costs. If you plan to stay in your home for an extended period of time, the upfront cost is less important.
Proprietary Reverse Mortgages
These loans are offered by private lenders. You may be able to get a larger loan from a private lender if you own a good quality home over $ 500,000. These loans are more expensive than one-way loans and are similar to HECMs.
How Much Money Can You Get From a Reverse Mortgage?
The amount of money you can access with a reverse mortgage depends on the amount of equity in your home, your age, and the current size of the home Market value, current interest rates and the specific type of reverse mortgage.
If you have another loan, lien, or an outstanding balance on your home equity line of credit, you must first pay the outstanding balance using any funds received from a reverse mortgage. The obligation includes property tax liens, contractors, or other private property liens.
What does a reverse mortgage cost?
The costs and terms of a single-purpose reverse mortgage and a proprietary reverse mortgage can vary. You want to shop with different agencies and Mortgage lender to find the most favorable terms. The cost of HECM loans is well documented as the government supports such loans. However, you do not have to pay the cost of the loan out of pocket as the cost can be covered by loan proceeds, reducing the net loan amount available for spending.
HECM costs include:
- Mortgage Insurance Premium (MIP): This mortgage insurance guarantees that you will receive the expected loan advances. You can fund the MEP as part of your loan. Initially, you will be charged 2% of the loan amount for MIP upon completion. This is followed by an annual MEP of 0.5% of the mortgage balance over the life of the loan.
- Third party fees: Third party costs include a valuation, title search and insurance, surveys, inspections, record keeping fees, mortgage taxes, credit checks, and other fees. These costs are paid upon completion.
- Origin Fee: As with any mortgage, the lender is paid to process your loan. A lender may charge more than 2% of the first $ 200,000 of the value of your home + 1% of the amount over $ 200,000 or $ 2,500. All origination fees are capped at $ 6,000.
- Service fee: Service fees over the life of the loan cover services that include sending the bank statements to you, paying property taxes and insurance on your behalf, and paying out loan proceeds. If the loan has an annual adjusted rate or a fixed rate, the maximum service fee is $ 30 per month. If your interest rate adjusts monthly, the monthly service fee is capped at $ 35.
Upon completing the loan, the lender will subtract the initial service fee from your available funds and then add each monthly service fee to your loan balance. Alternatively, lenders can include the service fee in the mortgage rate by charging a higher rate.
Reverse Mortgage Pros and Cons
- A reverse mortgage can give you financial options and additional income in retirement.
- If the main borrower dies, the spouse can stay in the house and continue to receive payments on the loan.
- You don’t have to make monthly mortgage payments.
- Depending on the type of reverse mortgage, your funds can be used for any expense.
- It can be used to stop or prevent foreclosure and home loss.
- You will owe more over time due to interest on the loan.
- You could lose your home if you don’t receive property taxes and insurance payments.
- You are reducing the equity in your home because you are actually lending it to yourself.
- The upfront cost of a reverse mortgage can be thousands of dollars.
- Your heirs may not be able to keep the house if they cannot afford to pay back the loan.
Is A Reverse Mortgage A Good Idea?
While a reverse mortgage comes with certain complications, it can be a great way to supplement your retirement income, pay medical expenses, or do renovations that will allow you to age on the spot. As with any loan, it makes sense to look for the best terms and fees. The guidance of a HECM advisor can help you make the best choice.