Recently, reverse mortgages are harder to get, due to the tight rules that have gone into effect. Seniors facing heavy debt problems are the first to be affected by these rules. The changes were made to support the product, by the Federal Housing Administration (FHA). Many retirees consider this option due to the many advantages. However, due to these changes many things have altered, which may actually result in more cons to pros. Listed below is a rundown to how reverse mortgages now work:
The basics remain the same. A reverse mortgage is referred to a loan that lets senior homeowners borrow money against the evenhandedness in their house. Until the homeowner dies, moves out for at least 12 months or sells the house, the loan doesn’t need to be repaid. With a reverse loan, you yourself, and not the bank own the house. This means you are still responsible for things like insurance, repairs and property taxes.
In order to be eligible for a reverse mortgage, you need to be at least 62 years of age, own your own home (or even a small balance), and you currently need to be living there. A financial assessment also needs to be undertaken in order to define whether you can afford to make the necessary insurance payments and tax, over the expected life of the loan.
Lenders will view your credit history, assets and sources of income. It all depends on your financial status whether you need to put part of your loan into an escrow account, for the payment of future bills. If it is found by the assessment that you are unable to pay your taxes and insurance, you will be denied.
The majority of reverse mortgages offered today are Home Equity Conversion Mortgages (HECM). These are insured by the FHA and are offered through banks and private mortgage lenders.
The amount you receive through a reverse mortgage depends on the main interest rates, your age and your home’s value. Usually, the older you are, the more your house is worth. Also, the lower the interest rates, the more you can borrow.
A number of up-front fees are involved. Included in these is the two percent lender initiation fee, which is for the first $200,000 of the value of the house as well as many others. You also need to pay a yearly mortgage insurance, premium of 1.25 percent of the loan amount.
You can receive the money either in a line of credit, regular monthly checks or a lump sum. In the majority of cases, you cannot take out more than 60 percent of the loan during the first year.
Why You Should Avoid a Reverse Mortgage
Many retirees think of this as a solid idea. However, as part of your retirement plan, there are many reasons to why a reverse mortgage should be avoided. Before you think of reverse mortgaging, you may want to consider the five reasons to why they aren’t always a good idea:
It’s a loan, which means you will face loan-related fees. These tend to be high and could be a potential risk for the lender.
High Interest Amount
Compared to a more traditional home loan, the loan on a reverse mortgage tends to be much higher. It could also be that you are spending more than how much you are getting.
Your Inheritors May Not Get the House
The loan for the mortgage is actually paid off when you sell your home. Once you die, the home needs to be sold in order to cover the loan amount. This means your heirs cannot have the house unless they pay off the mortgage after your death.
The Loan Needs To Be Repaid When You Move Out
If you have not lived in the home for a year, you are considered ‘moved out’. If you are living in a care home, you are also considered ‘moved out.’ This means if you cannot stay at your home you need to begin repaying the mortgage.
Responsibility for Home Costs
During all this, you are still in charge for your home costs. This means you need to keep up with the homeowners insurance, pay property taxes, as well as the maintenance on the home.
The situation is tough, so be sure to think it through properly so you don’t end up regretting anything. Many difficulties may arise and you will also have to face many high costs. If you wish to move out at some point, or want to leave the property to your heirs, the mortgage will give you far more trouble than you think.
A superior resolution would be to set your retirement number and search for creative solutions. This is to help you retire without any negative baggage of a reverse loan.