Older people are among those who find themselves in financial trouble because they are living off retirement income which is fixed. Yet, they have to contend with the prices of goods and services that increase year after year and their continued reliance on doctors, hospitals, and medicines for their healthcare needs. Because of this, it is important for them to find ways to augment their income. For senior citizens who are already almost finished with their mortgage or those who already own their homes free and clear, it is possible to get money from their home by obtaining a reverse mortgage.
In simplest terms, a reverse mortgage is a loan against your home. But unlike the regular mortgage which you used to buy your home, you don’t have to pay it each month. In fact, you don’t even have to pay it at all for as long as you are staying in your home. You are only obligated to pay a reverse mortgage in full if you move out, sell it, or die. It also becomes immediately payable if you don’t comply with some loan provisions like not being up-to-date with insurance and tax payments.
When you take a reverse mortgage, you’re actually taking out the equity which you have built in your home when you were still paying your monthly mortgage. You can choose to receive this equity in lump sum, as a monthly stipend, or as a line of credit for you to withdraw from whenever you need the money.
To qualify for a reverse mortgage, you need to be at least 62 years old and have a very low mortgage balance or already own the home outright. You must also use the home as your primary residence. Moreover, your home will be eligible for a reverse mortgage program if it is a single-family home. If you have a quadruplex (house with 4-units), you must live in one of the units to be eligible.
What makes a reverse mortgage even more appealing is that your credit score and your income level are not taken into consideration when you get a reverse mortgage loan. What matters is that your age qualifies and you actually have equity in your home on which to take the loan against. Also, the title of your home remains with you. Even if you take out the entire loan and outlive it, the lender will not be able to foreclose your house for as long as you pay the homeowners insurance and property taxes.
Take note, however, that a reverse mortgage is still a loan. As such, it is still subject to interest charges and other costs. So if you don’t pay it, the interest rates could accrue and eat up your entire equity. Now if you don’t have any plans to move from your home until the day you die and couldn’t care less if it gets sold to pay off your debt on the day you die then you really don’t have to pay off a reverse mortgage loan.
However, you might reconsider and think about repaying a reverse mortgage loan if you want to leave your home to your children when you pass away. You surely do not want to leave this debt burden to them.
Before you go ahead and shop for a reverse mortgage product, it is important to ask yourself if you really need it. You have to keep in mind that these are very expensive loans that should only be resorted to when other ways to address your financial concerns have been sought. Here are some questions that you must answer before taking out a reverse mortgage:
How badly do you need a reverse mortgage? If you are just planning to take out the equity in your home to fund that dream trip around the world then you’re heading in the wrong direction. If you are planning to tap into your equity to pay off credit card debt, think again. Perhaps there are other ways for you to meet your financial obligations without taking this route.
While these are considered “safe” loans, the complicated rules and high upfront fees, the HUD reveals that there are 46,000 reverse mortgages that are in default. If you don’t want to be part of this statistic, you should see to it that the loan is taken for the right purpose and only when all other means to raise the funds needed have been tried. A good rule of thumb to follow is: If it’s not a real financial emergency, don’t use your home’s equity.
Are the loans affordable to you? But I don’t have to pay them, right? True, you don’t have to but that won’t keep the interest from accumulating. Also, when the money from the loan runs out, you still have to make sure that you have the dough to pay for the homeowners insurance, property taxes, utility bills, and the cost of maintaining your home. Otherwise, the loan becomes immediately due and payable, putting you on the road to foreclosure.
You should also think about the welfare of your dependents that will still need to live in that house in the event of your death. You’re throwing them to the streets if you don’t pay off your loan. To ensure that your spouse will still have a place to stay even if you die or have to go to a nursing home, make sure that both of you sign the reverse mortgage.
Do you know everything there is to know about your loan agreement? There are different risks associated with obtaining a reverse mortgage that are not found in any other loan. You should do your research carefully before signing a reverse mortgage agreement.
According to the Federal Trade Commission (FTC), there are three types of reverse mortgages. These are 1) Single-Purpose Reverse Mortgages; 2) Home Equity Conversion Mortgages; and 3) Proprietary Reverse Mortgages. Knowing that you have these options is the first step towards choosing your mortgage product correctly.
Single-purpose reverse mortgages are the cheapest loans around. State and local government agencies and nonprofit organizations offer them. The reason why they are so affordable is because the loan is used for only a single purpose that is expressly specified by the lending institution.
Home Equity Conversion Mortgages (HECM) are Federally-insured because they are backed by the U.S. Department of Housing and Urban Development (HUD). Proprietary Reverse Mortgages, on the other hand, are backed by private lenders. While these two loans have higher upfront costs, the loan grants are higher and are not limited to only one purpose—you can use the proceeds as you wish.
The next step in choosing a reverse mortgage is to compare mortgage products. Take note that there are many lenders offering reverse mortgage products so you don’t have to be pressured into choosing the first one that comes along. Compare interest rates. You can usually find lenders that offer lower interest rates if you just take the time to compare products.
Make sure that you understand the entire loan agreement before taking out the loan. A reverse mortgage may seem like the best way out of your financial worries but take note that these contracts are as complicated as your original mortgage loan. You should know what the fees and closing costs involved are, for starters.
Before taking out a reverse mortgage, you have to remember that aside from the property taxes and insurance, you should also be to pay the bills for utilities, fuel, and other expenses that will keep your home in good condition. Otherwise, your loan may immediately become due. Make sure that you know what your responsibilities are as a homeowner with a reverse mortgage as stipulated in the contract so you are not caught off-guard.
It is also important to understand that you are not obligated to buy any other product other than loan itself and the necessary insurances. There are some lenders who might make you feel that you need to buy the company’s other products like long-term care insurance, together with the reverse mortgage. Well, you don’t need to.
Don’t borrow more than necessary. Even if a reverse mortgage does not have to be paid during your lifetime, it is always prudent to keep in mind that this is a still a loan and if you want to be sure that you can repay it so that you will still be able to leave your home to your heirs then you should borrow only what you need. If you only need a reverse mortgage to repair a leaking roof, for example, then looking for a single-purpose one rather than an HECM is ultimately more practical. You can certainly borrow more with an HECM but take note that the corresponding cost also rises.
Finally, know that you have a three-day right to cancel without penalty any agreement for a reverse mortgage that you have already entered into with a lender. You have three business days to rescind the contract for whatever reason. Just make sure that you inform your lender by certified mail with a return receipt requested. The lender is given 20 days to return any money you have given to them.
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