4 Ways To Get The Best Value From Reverse Home Mortgages
A reverse home mortgage, as the name implies, works in the opposite fashion of a traditional mortgage. In the latter, a person can borrow a large sum of money then repay it over an extended period of time. Once they do, the term (or life) of the loan is up. In a reverse mortgage, however, the borrower receives either a sum or a stream of money but has no obligation to repay that money until the term of the loan runs out; this occurs when neither the borrower nor his or her eligible spouse remains in the home—an event that could conceivably be decades in the future.On the surface, this seems like a great deal: it provides cash-in-hand with enough of a buffer before the loan matures to ensure that it can be paid back. However, reverse mortgages are unfortunately not that simple, nor are the circumstances surrounding them. Before settling on such a loan, consider these four points.
A reverse mortgage should be an act of last resort. It provides quick money—though perhaps not quite as much as you think—but that money must ultimately be paid back. These loans are meant for senior citizens to supplement fixed incomes by leveraging the equity they’ve put into their homes.If you have other sources of capital—a savings account, stock portfolio, retirement account, etc.—then you should tap these before you ever consider a reverse mortgage. Reverse mortgages are meant to provide relatively quick, easy access to cash when none is available. If you possess financial means, you should use that before taking on any substantial debt.
Evaluate Your Situation
First of all, to qualify for a reverse mortgage, you must be 62 years of age or older. You must also own your home outright or else the principle of your home mortgage must be small enough that it can be paid off by the reverse mortgage loan. You must also possess the means of paying property taxes and insurance. The reverse mortgage is designed for people who have little cash, either on hand or through income streams, but who have lots of equity tied up in their homes. Precisely how much of this equity you can access depends on three major factors. The first two are the age of the youngest borrower and the current interest rate. The third is the least of three values: the home’s appraised value, its sales price or $625,500 (which is the Federal Housing Authority’s limit on reverse mortgages).
Consider the Hidden Costs
However much your home is worth under a reverse mortgage, you won’t see all of that money. You will have to pay an appraisal fee to establish an objective value of your home. You will also have to pay the lender an origination fee; this is two percent of your homes value, up to $200,000, beyond which you’ll pay another one percent on the additional value, up to $6,000 (the cap for origination fees). There will also be closing costs to pay when finalizing the mortgage.Over the life of the loan, you will be required to keep up your homeowner’s insurance and pay property taxes owed. Failure to do so can cause the loan to mature and your debt to come due. You’ll most likely also have to pay mortgage insurance, which will protect you or your heirs from having to repay more than the real value of your home. You can also expect to pay your lender service fees over the life of the loan as well.Not all of these costs are truly hidden, but they may also not be immediately apparent. Make sure that you know exactly what you’re going to have to pay, up front and over the life of the loan, before moving forward on a reverse mortgage.
Make the Right Deal
The biggest decision with a reverse mortgage is the fixed or variable interest rate. Fixed rate mortgages will provide a percentage of equity in a single lump sum. Variable interest rate reverse mortgages give you much more flexibility with how you receive your money: either as a line of credit, a regular payout, cash on demand or some combination thereof. However, that flexibility comes at a cost. Rather than paying a flat, established interest rate, your rate can and will fluctuate over the life of the loan. Either way, interest is calculated based on the principal borrowed, not the total value of the house.If the borrower’s spouse intends to remain in the home after the borrower’s death, there are two ways to ensure this is possible. The first is for the couple to be co-borrowers of the loan, which will not mature until neither borrower remains in the home. The other way is to co-own the home and ensure that the non-borrowing spouse qualifies to extend the life of the loan after the borrower’s death.Finally, only deal with lenders that you fully trust. Following the real estate bust and the recession, reverse mortgages became one of the few commercially viable types of loans, leading to a proliferation of inexperienced as well as predatory agents. Know the facts about your loan to ensure you’re not being taken advantage of.After considering these points, you’re in a good position to decide if a reverse mortgage is a good choice for you. Under the right circumstances, and with proper planning, borrowing against your home can ensure financial security in the years you need it most.