REVERSE MORTGAGES: ARE YOU SITTING ON A PILE OF MONEY?
REVERSE MORTGAGES: ARE YOU SITTING ON A PILE OF MONEY?
State College mortgage company Principle Home Mortgage is on a mission to give you the facts about reverse mortgages. We sat down with D. Shane Whitteker, owner and chief broker at Principle Home Mortgage, to discuss some frequently asked questions about reverse mortgages.
What is a Reverse Mortgage?
This type of mortgage, which is also known as a Home Equity Conversion Mortgage (HECM), was created by the Department of Housing and Urban Development (HUD) in the 1980s. It allows seniors who own their homes outright or have a substantial amount of equity to put their home to work for them. Although you still have to meet certain qualifications, a reverse mortgage pays you instead of you paying the lender.
How Does a Reverse Mortgage Work?
First, you'll have to find a mortgage lender who offers this product. They'll go over the qualifications and set up an appointment with a credit counselor if everything is in order. The credit counselor will make sure that you understand the risks and obligations, and they'll assess whether you can still meet your tax and insurance requirements after your mortgage is approved. You'll also have to have your home appraised to determine its value, and provide documentation proving that your current mortgage has been paid in full or stating amount still owed. Once the loan is approved, you meet with the lender to close. You have three business days after the final closing to exercise the “right of rescission," which means you can cancel the agreement without a penalty within that time.
You'll still be able to retain ownership and control over your home, and your heirs can still inherit your property when you die as long as the outstanding balance, interest, and fees can be repaid by the balance, by selling assets, or by selling the home. You can even refinance a reverse mortgage, which is a bonus if property values increase. There are closing costs and fees involved, and you will have to pay interest, which can either be fixed or variable. Fees and other costs can be added to the loan amount, so you won't have to pay them up front unless you choose to. The amounts depend on the type of conversion loan and terms.
Once the three-day rescission period has passed, a cashier's check for your loan will be deposited into your bank account. Payments will be meted out in one of four ways:
* Monthly, as a form of supplemental income
* As a lump-sum payment minus fees
* As an open credit line that you can draw against each month
* Any combination of the above payments
How is This Different From a Mortgage Refinance or A Home Equity Credit Line?
Reverse Mortgages differ from other mortgage products in several ways. First of all, there are no monthly payments to worry about. The balance is due when the title holder(s) die or the home is sold. Second, since property values usually increase, the amount of money you can access increases.Best of all, as long as you maintain your commitments, the amount of the monthly payments can't be frozen, reduced, or otherwise altered.
What Can You Use the Money For?
The proceeds from your conversion loan are yours to spend as you please. You can pay off the balance of your mortgage, take a trip, pay medical bills, or just use the extra cash to fix up your home or give yourself some peace of mind. However, it's risky to use the money to invest in anything speculative like stocks or annuities.
What Are the Benefits?
Some seniors may be worried that getting a reverse mortgage will affect their eligibility under Medicare or Social Security. You can rest assured that it won't. However, if you receive any type of benefits that are based on need, like Medicaid or Medicare-based financial assistance to cover out-of-pocket expenses, the loan may affect those. Advantages include:
* Aging in place with no mortgage payments or financial problems
* Pays your remaining mortgage balance
* Money can be used to buy a new home if you want to downsize
* Improves your monthly cash flow
* The income from a reverse mortgage usually isn't subject to income tax
* Even if one borrower dies or has to go into an assisted living facility, the other can remain in the home. In fact, the extra income will help ease the financial burden of such events.
Are There Any Risks?
Any kind of financial arrangement comes with some risks or disadvantages, and there are times when a home conversion loan is a bad idea. For example, you shouldn't look into getting a reverse mortgage if you plan on selling your home within two years or less. Other consideration that come with a reverse mortgage include:
* Inclusion of anyone on the title as a co-borrower
* Anyone on the title who doesn't meet the minimum age requirement can't remain on the title
* The cost is higher than with traditional home loans
* You're still responsible for home owner's insurance and property taxes
* A reverse mortgage might affect your children's inheritance
* Accruing fees, variable interest rates, or rising insurance premiums may increase your balance
How Do You Qualify?
With a reverse mortgage, many seniors use the funds to supplement their Social Security or pension. The qualifications are pretty simple, but some types of properties are exempt. These include: trailer homes, manufactured housing, duplexes, condominiums, and townhouses unless you receive special financing arrangements. In order to obtain a reverse mortgage, you must:
* Own your home free and clear or have a small enough balance to pay off the existing mortgage.
* Be 62 years of age or older; all others persons on the deed must also be at least 62 years old or removed from the title.
* Use the home as your primary residence
* Attend a credit counseling session with a HUD/FHA-approved counselor
* Maintain the home in good repair
A reverse mortgage is a smart, low-risk way to get a little peace of mind when you need some extra cash after retirement. It's a great way to tap into your biggest asset. Contact State College mortgage company Principle Home Mortgage to request a rate quote or set up an appointment to speak to a home finance expert.