REVERSE MORTGAGE AS RETIREMENT TOOL
Susan is 65 years old and owns a house. Although she has a stable retirement income, this former public school teacher wants to supplement her income.
Whether you want to fund home improvement, settle existing mortgage, augment income, or pay for healthcare expenses, you may want to consider obtaining a reverse mortgage. It is a type of loan enabling a homeowner to borrow money against the value of his or her house. Oftentimes, the lender won’t require the borrower to repay the loan provide the individual lives in the house and have not sold the property. This is ideal for people who do not like the idea of making loan payments.
Payouts from reverse mortgage are usually tax-free and various reverse mortgages place no income restrictions. A creditor gives payments to a person according to the percentage of his or her house’s value. When an individual no longer resides in the property, the lender sells it to recuperate the money paid out to the borrower.
A reverse mortgage has several features:
- Financing fees may be integrated in the loan’s cost.
- Lenders offer higher loan amounts to older homeowners than younger borrowers, and more expensive houses qualify for bigger mortgages.
- This mortgage must be the original debt against the property. Borrowers should repay other lenders, or creditors must agree to subordinate their loans to the primary mortgage holder.
- The lender can request repayment if the borrower fails to maintain the property, retains the property’s insurance, pay property taxes, declare bankruptcy, commit fraudulent act, or abandon the property. The lender may also make that request if the house is condemned or if the individual adds a new owner to the property title, change its zoning classification, sublet all or portion of the house, or take out additional loans against it.
There are various kinds of reverse mortgages, but this article will explain the most common ones:
- Single-purpose reverse mortgage - Considered the least expensive option, this is offered by state and local government agencies, as well as nonprofit organizations. Such loans are not as prevalent as the remaining loans.
- Home Equity Conversion Mortgages (HECMs) - The federally-insured reverse mortgage is backed by the US Department of Housing and Urban Development (HUD). First offered in 1989, the sole mortgage provided by the government limits the expense to borrowers and assures lenders will fulfill the obligations. But the maximum loan amount is capped.
- Proprietary reverse mortgages - The private loan is utilized for bigger advance for a house appraised at a high value. Backed by firms, those with low mortgages qualify for more funding. But this can be substantially greater than federally-backed loans.
The total cost of the loan varies from lender to lender. The US government determines the interest rate on an HECM mortgage. Its origination cost is limited to 2% to the home’s value. When looking for a lender, one must take into account third-party closing costs, insurance, and servicing fee. The truth-in-lending law is imposed to help borrowers compare costs by providing a cost disclosure through the total annual loan cost (TALC).
Reverse mortgages from the government has different income options such as credit lines, monthly cash advances, lump-sum payouts, or any combination of these. Probably, the most distinct feature of an HECM loan is the credit line income option as the amount of money available to the homeowner escalates through time by the interest rate. On the other hand, private loans have fewer choices.
Speaking of rates, the interest rate on HECM mortgages is linked to the one-year US Treasury security rate. Borrowers can choose a rate which can change monthly or annually. A yearly adjustable rate changes by the same rate as any increase or decline in the security rate. This rate is limited at 2% each year or 5% over the loan’s term. On the other hand, a monthly adjustable rate mortgage (ARM) starts with a lower rate than the ARM and changes every month, which can climb or drop 10% over the loan’s life.
Now, you have learned the fundamentals of reverse mortgage. Before securing this loan, be wary of sales pitches and plan carefully because it can hugely affect your present finances and the estate you will leave to your heirs. Do your own diligence. Shop around, compare rates from numerous lenders, and study all disclosure documents. Also, resist the pressure from sales pitches. For instance, if they press you to purchase other financial products before getting a reverse mortgage, say no. You need not to buy any instrument to get this loan except in very few cases. As a matter of fact, it is illegal to buy other items to secure this mortgage in some situations.
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