Gaining popularity: Reverse Mortgages

A reverse mortgage is financial product that is marketed by lenders as a retirement tool. It has been recently regaining its popularity, due to the aging baby boomer population and its expected to continue growing. Many financial experts insist on using it with caution, as there are inherent risks in pursing this type of loan. The reverse mortgage was formerly called a home equity conversion mortgage (HECM), though the terms are still used interchangeably today. A reverse mortgage, or HECM, coverts the equity of the home into a combination of cash, monthly income, or a line of credit, without requiring the borrower to make monthly interest or principle payments until they sell the home, or pass away. However, terms of a reverse mortgage do require the homeowner to pay their homeowners insurance, property taxes, and utilities, or they risk losing their home.

Gaining popularity: Reverse Mortgages

This financial product is targeted to seniors, whom have built up equity in their home, but have little savings for their retirement. Some may find they are strapped for income, but don’t want to leave their homes. Unfortunately this has become all too common with the aging population, either due to the economic crashes they faced, higher needs and expectations of retirement, or unforeseen medical costs and special care.

Having said that, there are some exceptions to the norm. Some seniors have built up great retirement funds, but do not want to use the funds at this specific time in their lives. This could be for a number of reasons, such as investments, or high interest savings accounts, but would like the additional monthly income to enjoy their retirement. If this sounds like your situation, try out a reverse mortgage calculator to see how much you may eligible for. Qualifying Factors To qualify for a reverse mortgage you must be at least 62 years old, and the home must be your primary residence. Some applicants have been between 80 and 100 years old, and still qualified for the loan as there is no age limit.

The recently tightened lending criteria requires the borrowers to show enough income to pay property taxes and homeowners insurance, as all HECM loans are FHA insured. This is to protect the lender from any losses down the road. With the stricter regulations, it can be difficult for the borrower to qualify if they are only living off social security.

The borrower is also required to receive counseling from a HECM counselor prior to getting the loan.

Most properties are eligible such as, single family homes, multi family homes (up for 4 units with owner occupying one), condos, and custom homes.

The amount you qualify for will depend on your age, the appraised value of the home and its location, your interest rate, and length of projected time left to live in the home. There are a number of online tools and calculators that are great preliminary research tools. Try this online reverse mortgage calculator to get a better understanding of how the loan works.

If approved, only a portion of the loan can be taken as cash in the first 12 months, and the rest would have to be divided into monthly income, or put into a line of credit.

If you get a reverse mortgage you still own the property, but the lender will put a lien on the home for the amount of loan. Loan Re-Payment The reverse mortgage is required to be paid in full if:

Most HECMs have a clause that allows the remaining spouse to continuing living in the home until they move or pass as well. Any proceeds from the sale of the home after the loan repayment belongs to the spouse or their heir. Termination If the homeowner does not pay their taxes, insurance, or utilities, or allows the home to deteriorate, the bank can terminate the contract and take possession of the home, essentially causing the borrower to lose all the equity in their home. Rising Rates The Federal Reserve has raised interest rates for a third time in a year and a half, in response to the improving economy. Rising interest rates mean lower principle limits. In accordance with the interest increase the principle limit has gone down by 1-2%. What is a principle limit? It’s the maximum amount that you can borrow with reverse mortgage. So what does this really mean? Borrowers looking to cover immediate expenses with a reverse mortgage will be the most effected by this change, as they will be limited on the funds they can initially draw from the loan. This forces the borrower to use the reverse mortgage more as a tool to supplement their retirement income, as opposed to a quick fix or bail out in difficult situations.

With the loan balance growing over time (no interest or principle payments are being made), and with the rising interest rates, the negative amortization pace is quickened. This will cause the loan to reach maturity much faster, so you may find that you used all the equity in your home only to end up in a very difficult situation. The entire repayment will inevitably go to the loan issuer, leaving the homeowner financially exhausted.

You can also incur a lot of costs such as origination fees, closing costs, servicing fees, and insurance premiums. If you don’t pay your insurance, maintenance, or taxes, or allow the property to deteriorate you can lose your home, and all your equity.

Therefore it’s important to seek the advice of a financial advisor, as well as doing extensive research, before deciding if this loan is right for you.

Blog March 21, 2017 admin No Comment(s)

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