Reverse Mortgage Tips

Reverse Mortgages: Is One Right For You?

It’s possible that you’ve heard about reverse mortgages but aren’t sure whether using one is best for your situation. Let’s explore everything you need to know about this type of mortgage. 

What is a reverse mortgage and how does it work? 

As a senior, you have the ability to borrow against the equity in your home when using a reverse mortgage. You no longer make monthly payments to your lender. Instead, your lender starts paying you monthly deposits. Or, you might choose to receive your money in a lump sum.  

D. Shane Whitteker is the owner and chief broker at State College mortgage company Principle Home Mortgage. He and his team specialize in helping their clients through every step of the reverse mortgage process.

“A reverse mortgage is used by a person or persons that qualify by age.  The reverse mortgage is set up with daily interest cost the same as a forward or standard mortgage,” Whitteker says. “The main difference is that this interest accrues on top of the original principle balance because no payment is being made.” 

According to Whitteker, a reverse mortgage is easier to obtain than a traditional mortgage.  

“The reverse mortgage is easier to qualify for and is typically more flexible than most standard forward mortgages. The income requirements and credit requirements are much less stringent on the reverse mortgage than on a forward mortgage.” 

What is the downside to a reverse mortgage? 

The cons associated with a reverse mortgage include: 

Upfront costs are high. You’ll find that fees include mortgage insurance expenses, origination fees and closing costs. The loan can cover these fees.  

Your equity shrinks over time because the mortgage balance increases over time.  

The loan is due if you decide to move out of the home or sell it. There are calculations that apply here that may reduce the amount owed but if there is over 5% equity in the home the full balance on the loan would typically be due.   

You’ll use an adjustable-rate mortgage. The interest rate will have the ability to increase over time.  

The down side of a reverse mortgage is the fact that you are under a negative amortization mortgage,” Whitteker explains. “This means your balance will increase each month because your interest accrues with no payment being made.” 

How long is the reverse mortgage process? How long does it take to get money from a reverse mortgage? 

Generally speaking, it should take you 30-45 days to complete the process when applying for a reverse mortgage. Of course, you need to consult with your local mortgage broker to know for sure. You’ll receive your money as soon as the process is completed.  

Whitteker says the time frame is a case by case basis. 

“In general this should be around the 30 day mark but would be a case by case scenario based on the specifics of the loan application in question,” Whitteker says. 

What should people keep in mind with a reverse mortgage? 

Whitteker recommends making sure your plan for a reverse mortgage aligns with your financial goals. 

“The main issue I think is what do you plan to do with your property?  Do you want the equity to go to family members?,” Whitteker asks. “If so a reverse mortgage may not be a good option.  I think proper planning is important in these transactions.  I also think it makes sense to involve a financial advisor in the planning process leading up to the reverse mortgage.” 

How much money can I get with a reverse mortgage? 

This will depend on the amount of equity you have in your home and your age. Normally, you can’t borrow more than 80% of this equity.  

In the past, the maximum you could expect to get from a reverse mortgage was around $200,000. However, Congress has passed legislation over the past few years to increase this amount. As of January 2019, the maximum reverse mortgage loan limit was increased to $726,525. 

“This really depends on the age of applicant(s) and title holders. The youngest age of the person(s) on the title or deed is the main dictating factor on loan to value which along with appraised value will set the loan amount,” Whitteker says. “This is all factored into the system designed to calculate the allowable loan to value and loan amount.” 

Whitteker says qualified loan amount estimates can vary.  

“From what I have seen a person that is 62 years old will most likely qualify for around 50-55% loan to value.  That means that this age person will be able to get half to a little above half of the property’s current value as a loan amount.” 

What happens if I outlive my reverse mortgage? 

You actually can’t outlive the reverse mortgage. The reason is that the loan doesn’t become due until the final owner moves out for over one year or passes away. You might spend all the money the loan provided you but you can remain in the home if insurance and taxes are paid on time. The loan doesn’t become payable until it is permanently vacated. Your heirs can decide to sell the home to pay the loan at that time.  

Are heirs responsible for reverse mortgage debt? 

Whitteker says no, your heirs are not responsible for the debt.  

“Heirs can incur the debt if they choose to but under current rules for the HECM (reverse mortgage) an heir can purchase the home for no more than 95% of the appraised value at the time of the purchase,” Whitteker says. 

They don’t need to pay back the loan and don’t need to take on responsibility for any balance. The reason is that your reverse mortgage is a non-recourse loan. You will pay into the Federal Housing Administration insurance fund at closing and each month you’re using the loan. This is used if the loan balance exceeds the home’s value.  

Can you walk away from a reverse mortgage? 

Yes you can, Whitteker says. Although it’s not advisable to just walk away, you can do that with no repercussions.  

“It would be better to simply contact the bank and ask that they prepare a deed in lieu of foreclosure (deed the property to the bank to avoid foreclosure),” Whitteker says. “Since there is no contract to make payments there would be no negative payment history associated with “walking away”.  

What percentage of equity is required for a reverse mortgage? 

“This is dependent upon the age of applicants and title holders,” Whitteker says. “The older you are the less equity you need.” 

How can I spend my reverse mortgage payments? 

Reverse mortgages provide payments that are typically tax-free and they can be used for anything you need the money for.  

For reverse mortgages in State College, contact the team at Principle Home Mortgage at 814-308-0959.

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