In the case of many homeowners over age 50 the house they live in is their largest capital asset. A reverse mortgage is a program designed specifically for homeowners age 62 ½+ to access home equity, however, it has advantages and disadvantages for the homeowner. Perhaps you’ve even heard the actor Tom Selleck discuss reverse mortgages in commercials, generating curiosity among older adults.
This article will help you with the information you should know to make an educated decision. We will discuss the pros and cons of reverse mortgages as well as how to determine what it could cost you, and if it’s the best financial decision depending on your circumstances.
What is a Reverse Mortgage?
Reverse mortgages
Reverse mortgages are a type of loan for homeowners 62 years or older that allows them to turn a portion of the equity in their home into cash. In contrast to a conventional mortgage, which requires monthly installments to a bank, the reverse mortgage can provide you access to your equity without you making mortgage payments. The outstanding mortgage balance is usually paid back at the time the borrower decides to sell the property, relocates, or even dies. The financial product could provide an ongoing income stream or an all-in lump sum cash. You must reside in your home as a principal residence and you are responsible for paying the real estate taxes, homeowners insurance and maintenance on your home.
What Are the 3 Types of Reverse Mortgages?
here are three primary kinds of reverse mortgages each of which is designed to suit various demands.
Single-Purpose Reverse Loans: These are the least popular type of loan that are provided by a few local and state government agencies in addition to non-profit organizations. Like the title suggests, the loan is only available to fulfill a specific need that is approved by the lender like paying for house repairs or property tax.
Private Reverse Mortgages They are loans financed by private firms which aren’t insured from the government. Since they’re private, they’re able to provide greater loan amounts. This makes the perfect choice for those who own properties with a high value. The loans typically have distinct sets of regulations and fees.
Home Equity Conversion Mortgages (HECMs): The most popular kind of reverse mortgage. They are insured by the Federal Housing Administration (FHA) with more rigorous guidelines, which include the requirement of homeowner counseling. These are the most sought-after options due to their flexibility regarding how you can access the home equity.
Pros and Cons of a Reverse Mortgage
The decision to take a reverse mortgage involves carefully considering the advantages and disadvantages to your specific financial situation.
Pros of a Reverse Mortgage
The flexibility of financial planning: You can take your money in the form of lump sum, installments on a monthly basis, or credit line or even a combination of the above options. It can be used to pay for the cost of living, medical expenses as well as home improvement.
No monthly loan payments: It is not required to pay monthly installments on your loan balance.
This could free up significant funds during retirement.
Stay at Your home: You retain the ownership of your house and are able to live in it provided you have fulfilled the obligations of a loan requirement of paying taxes and insuring your home.
Non-Recourse loan: With a Reverse Mortgage, you or family are not liable for anything more than the underwriting appraised value of the property when the loan is paid back. The FHA insurance pays for any gaps, if the property drops below the mortgage amount.
Cons of a Reverse Mortgage
Higher Upfront Costs: Origination fees and mortgage insurance premiums as well as closing costs could be significant, and often greater than the costs for a conventional mortgage.
Decreased equity in your home: When you take out money, your loan balance is increasing, reducing the equity of the home. That means that there’s less cash for you, or your heirs if you sell your house.
Effect on the Heirs: Your heirs are the ones to inherit your home, and the loan. They’ll need to pay the loan usually by either selling the house or refinancing.
The loan may become due: The loan is due and payable when you sell the property or fail to pay your property tax and homeowners insurance.
How to Calculate a Reverse Mortgage
There are a variety of factors that determine how much you can borrow. Reverse mortgage calculation cannot be a universal formula. Lenders consider:
What’s Your Age
Any borrower must be a minimum age of 62 ½. You must have the documented income to pay for the subject property real estate taxes and homeowner insurance. You are required to live in the home as your primary residence. Your federal income taxes must be filed and current. The Home Valuation The appraisal value of your home is the most important aspect.
Present Interest Rates Current Interest Rates: interest rates for reverse mortgage loans in the moment the application is submitted will influence the amount you can borrow.
The specific loan type: The limits for HECMs are determined by the FHA however, private loans can offer greater amounts.
For a better understanding of the amount you could be eligible for, make use of the reverse mortgage calculator. These online tools can offer a reverse mortgage quote that is based on the details of your personal information. It helps you determine the amount you will be able to receive as a lump sum or a line or credit.
Reverse Mortgage Loan Rates and Estimates
Rates for reverse mortgage loans are either variable or fixed. The fixed rate is usually applied only for a lump sum withdrawal that is where you receive all funds that are available at closing. Variable rates are more prevalent and usually necessary if you select an account with a credit line or monthly installments.
Variable rates are linked to a widely known financial index and may change with time. Although the loan rate might rise and fall, it can also offer greater flexibility when it comes to how you use your money. If you are looking for the refinancing estimate, always inquire from the lender about the rate structure and the impact it will have on the loan’s balance in time.
Reverse Mortgages in Florida
Florida is one of the most popular states with retirees and is an ideal location in reverse mortgages. Florida’s high population of senior citizens and its high house prices create a competitive market. If you’re thinking about applying for a reverse mortgage in Florida it is possible to do so. It is comparable to that of other states. However, it’s recommended to choose one who is familiar with the market in your area. Property laws and state-specific rules may play an integral role therefore choosing a seasoned professional is crucial.
Is a Reverse Mortgage a Good Idea?
The issue of whether or not the reverse mortgage would be the best option will depend on your financial and personal situation.
Reverse mortgages may work in the following situations:
If you are over the age of 62 and planning to live in your home as a primary residence.
There is a significant amount of equity in your home and you require money to fund your retirement.
You are limited in other sources of income and you want to enhance your standard of living.
It might be a good idea if:
It is your intention to relocate in the next few years.
A large inheritance left to your heirs is the top prioritization.
Are you uncomfortable at the thought of borrowing more in your retirement.
Prior to making a final decision, it is mandatory to HECM applicants to participate in an initial counseling session with a licensed counselor approved by the government. The counselor will assure you that you understand the benefits and cons of reverse mortgages and make an educated decision for a nominal cost.
Your Next Steps
Reverse mortgages can be an effective tool to ensure the security of your finances in retirement, however, it’s a difficult choice that shouldn’t be taken lightly. Begin with the reverse mortgage calculator to obtain a rough estimate. Next, consult an advisor in the field of finance and a qualified reverse mortgage counselor in order to discuss all the options available. Through research and analyzing your options, you will be able to decide if it is an appropriate choice to your financial goals.