Things You Should Know About a Reverse Mortgage
Are you considering getting a reverse mortgage? Do you want to know how they work? A reverse mortgage is a loan whereby the lender pays you, unlike standard mortgages where you pay the lender. Instead, part of your home equity is converted into payments paid to you in advance on agreed terms of a monthly basis or lump sum.
In addition, you don’t need to pay any money to the lender so long as you reside in that home. Therefore, you will not pay any loan until you move out of the house or pass on.
There are different kinds of mortgages for seniors including loans for seniors single-purpose run by local government agencies and nonprofits. The second type is propriety reverse mortgages which are private’s loans.
The third reverse mortgage type is the HECM that stands for Home Equity Conversion Mortgages or HECMs. These are the most common form of reverse mortgages.
The reverse mortgage may feel like free money, but it is a loan. Service fees, loan interest, and insurance for the mortgages are assessed and added to the loan balance. The total costs will add up significantly.
Reverse mortgages are mostly considered the best loans for seniors aged 62 years and above. Seniors can access their equity at a time when they may need it most.
The best arrangements for reverse mortgages are made through FHA program as they offer consumer protections and follow the fellow guidelines. Following are requirements for you to qualify for mortgages for seniors:
- Must be aged 62 years and above.
- Be the primary residence living in the home
- No federal debt as of date.
- The home must adhere to all FHA requirements.
You can choose to live in your home and receive the payment so long as you are alive regardless of what payment type you have; you can never be forced to sell your home to pay the mortgage off. No payments are made unless you are not living in that home.
Upsides on Loans For Seniors
Receive Regular Income For Retirement
You get regular income for the period you are alive and residing in your residence as a primary residence and retirement. It is a big up for any retiree who is struggling with daily upkeep expenses.
According to FHA, the amount of equity you have is considered if you have made a down payment of a good amount instead of owning the home right away. You can also arrange to have a line of credit to access the money as needed.
No Taxes on Your Income
Your income is not subject to any taxes as IRS considers Loans for seniors as a loan and not a regular income. Therefore, it is not calculated in formulas used for income to affect your medical benefits or social security.
Not a Recourse Loan
Most retirees may worry if the home they reside in as mortgages for seniors loses value and can’t sell for what they owe. FHA mortgage insurance does cover the difference between the home value and the sales price in such situations. The home must sell for 95% of the value appraised, and the price is within government boundaries.
It is, therefore, wise to ensure that you have FHA insurance so that you are not forced to pay more than the home price.
NO Forced Early Repayment
The repayment of Loans for seniors is affected when you are not living anymore in your mortgages for seniors home, sell it, or no longer alive. If you sell your home, you need to use the proceeds to pay off the loan balance. However, if you sell it more than you owe, you can keep the difference and use it elsewhere.
You are likely to pay the taxes, insurance, and maintenance expenses every month. If you pass on, the next of kin or heirs must sell the home to get proceeds just if they cannot pay the loan. They can use the proceeds to pay off the loan but pay at the current market value.
Cons of Reverse Mortgages
Must Be 62 or Older
You must be 62 years of age to qualify for reverse mortgages for seniors. If your spouse is younger, the reverse mortgage process will be affected. You may have to wait until both of you attain the age requirement.
You can opt for non-FHA insured Loans for seniors, but you are not assured of protection.
Extra Costs Involved With Reverse Mortgages
Some extra fees come along with mortgages for seniors including:
The mortgage insurance fee is a 2% initial premium of the loan amount and a 0.5% annual outstanding loan balance.
- Third-party charges depending on your lender to close the process.
- Origination fee of almost $6,000 depending on the value of your mortgage.
- FHA allows the lender to charge monthly service fees.
- These fees can be added up to your loan hence reducing your income.
The Inability For Inheritors to Keep The Home
If your home’s value cannot pay off your loan, it may be hard for your heirs to pay it off if they don’t have other resources. It will have to be sold instead of keeping it. This website outlines how to sell an house inherited house with a mortgage attached to it. Many people in real estate consider it wise to have a way to have it paid off when you pass on or at least have life insurance to clear any debts.
Long Term Care at a Nursing Home
If you move to a nursing home for care for more than 12 months consecutively, your mortgages for seniors become due. It is considered as you are not your home as the primary residence.
The bottom line is that a reverse mortgage is just like other financial tools and need to be well analyzed and understood before engaging in one. “However, you have the potential to receive regular income in the condition that you reside within the property consistently” says Pete Beeda, a realtor from Chicago area at Short Sales Certified..
It is good to understand how it will benefit you personally as a senior and your heirs once you pass on. It is not free money but a loan with service fees, interest, and added to your balance. Some of your home equity is turned into cash, and one must be eligible to qualify for loans for seniors.
