Is a Reverse Mortgage Right for You?
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Author: Matt Dimler Understanding Reverse Mortgages
A Reverse Mortgage, also known as a Home Equity Conversion Mortgage or “HECM,” is a mortgage option that allows homeowners age 62 and older to liquidate the equity in their home in the form of a rolling line of credit, tax-free monthly payments made to the homeowner, a lump sum, or a combination of any of the three.
Interest rates are fixed for lump sum payments and adjustable monthly or yearly for line of credit and monthly payment plans.
A reverse mortgage differs from a home equity loan in that no payments are due on it as long as the home is the mortgage holder’s primary residence. This amount, with interest, must be paid however if the owner(s) move or sell the property, or by the last owner’s estate should he or she pass away. Even if no more equity exists in the home, while the owners will receive no more money, no payments will be due. This is all assuming insurance and property taxes are kept current.
The more an owner’s home is worth, and the older he is, the lower his interest rate will be. A lower interest rate results in higher monthly payouts.
Am I Qualified?
In order to qualify for a reverse mortgage, homeowners must be 62 years of age or older, currently reside in the home from which the equity is being drawn, and either own their home or have a low balance on their mortgages. A balance on a previous mortgage will be paid off at closing with a lump sum withdraw on the reverse mortgage. Both partners in a couple must be at least 62 years of age.
Another important difference between a reverse mortgage and a second mortgage or home equity loan is that it does not depend on income. It is based solely on the mortgage holder’s age, the appraised value of the home, and the current interest rate.
This is only applicable however, for homes valuing at less than or equal to $625,000. Payment calculations for homes worth more than this are done as though the home were worth $625,000. A better option for homeowners whose properties exceed this value is a jumbo reverse mortgage.
What Is It Good For?
For qualified seniors, a reverse mortgage is a great way to supplement a fixed income, consolidate debt, or free up money for unexpected medical expenses or home improvements.
Reverse mortgages provide fair interest rates with no payments due as long as the holder lives in the home. Holders of reverse mortgages cannot be foreclosed upon or forced out of their homes because they missed a payment, because there are no payments to make. Strict laws regulating reverse mortgages ensure this.
Reverse mortgages are ideal for retirees who require increased cash flow but have no means of acquiring income.
What Are the Pitfalls?
Reverse mortgage lenders issue money with the promise that they will get it back when you are finished living in your home, one way or another. Not knowing if you will live to be a hundred, the bank takes a chance that it may have to wait thirty years to get its money. To compensate for this risk, interest rates on reverse mortgages tend to be higher than those of comparable home equity loans.
Also, if the homeowner dies, the bank sells the house in the name of the estate and deducts the mortgage amount, plus interest, from the proceeds of the sale.
This only happens, however, when the last homeowner on the mortgage agreement dies, making it possible for a widower to continue living in his home after his spouse has passed away.
While there is no title transfer, appraisal fees and other costs are incurred. Seniors with a tight budget looking for a more immediate remedy should be prepared to meet these expenses.
Lastly, qualifying seniors with a steady source of income may be better suited with a traditional home equity loan with a lower interest rate. This option requires payments, but yields less in interest long-term. A refinance with a lowered monthly payment may provide other options as well if you still have a balance on your previous mortgage.
Is a Reverse Mortgage Right for You?
It’s important to be weary of scams that make reverse mortgages sound like a bargain, as if you were almost receiving free money. Reverse mortgages are government regulated programs designed to help seniors stay in their homes.
Weigh the pros and cons, but before that, develop a plan. Ask yourself what you plan to do with your house in the next few years. Do you hope to stay in it? Sell it?
Interest rates are prescribed according to the value of the home and the age of the owner. How much can you save by waiting a year or two? How immediate is your need? A small home equity loan with a lower interest rate might meet an immediate need and still leave the option to take a reverse mortgage later, and at a lower interest rate.
Do you want your family to inherit the home? Discuss the possibility of a reverse mortgage with your heirs and anyone involved in your estate. They inherit your house as well as the money you owe on it.
Karen Zabel is a freelance writer who writes about a variety of topics including a reverse mortgage.
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