The credit card company is calling you every morning. Your checking account is slowly dwindling. You’re wondering how you are going to pay the mortgage next month. And now you have to go to the emergency room for a health problem. You are stressing out wondering how you are going to pay the bills. “What am I going to do?”
The answer to your money worries may be a reverse mortgage. You can use this article as a reverse mortgage guide, but you should still seek the advice of a licensed professional before making any decisions.
If you own a home with equity in it, a reverse mortgage may be an option to help pay your bills.
How Does a Reverse Mortgage Work?
A “normal” mortgage is a loan you take from a lender to purchase a home. Each month, you make payments to the bank to pay the interest and principal on the loan.
With a reverse mortgage, you take out a loan based on the real estate property you own, and the lender pays YOU each month. How much money you get each month is based on various factors, so it is best to first determine if the reverse mortgage is the right solution for you.
Qualifying for a Reverse Mortgage
Generally, to qualify for a reverse mortgage you must be at least 62 years old and you own a single-family home or 2-4-unit property with equity in it. The home must be your primary residence. In the case of a 2-4-unit property, you must occupy one of the units.
One of the factors in determining how much you get is how much money you owe on the property and how much the property is currently worth.
The difference between these two values is called “equity” (one key thing to note is that equity can fluctuate depending on market conditions which affects the amount of money you can borrow). One way to look at a reverse mortgage is it’s like an advance on the value of your home, but you don’t have to sell your home to realize the value increase.
Like a traditional mortgage, you will have to apply with a lender. Then, the lender will verify the financial information on your application to determine how much money you qualify for.
The funds you receive can be a partial lump sum payment, monthly installments, and even a line of credit.
Paying Back a Reverse Morgage
As long as you keep up with the payments for the property’s expenses (property tax, insurance, utilities, maintenance, HOA, etc.), and at least one spouse lives on the property, you should not have to repay the loan early.
Depending on the lender’s assessment of your financial position, they may also require you to have a “set-aside” to ensure that you have enough money to pay for these expenses related to your property.
Reverse Loan Fees
Of course, there will be fees the lender charges you for the loan, but these fees may be financed into the loan keeping your out of pocket costs to a minimum.
The fees will vary depending on the type of reverse mortgage you receive. Among these fees are origination fees, closing costs, servicing fees, and mortgage insurance premiums.
Each month, the interest on the reverse mortgage is added to the amount you owe. This results in an increase in the amount owed to the lender.
Types of Reverse Morgage
There are three types of reverse mortgages – each with their own pros and cons.
Reverse mortgages are known to be complicated so before deciding if a reverse mortgage is a good idea for your situation you should receive reverse mortgage counseling. During this conversation with a counselor you should learn about the different types of reverse mortgages, take your time to understand the loan, and know what is required of you to maintain the loan.
Some types of reverse mortgages actually require that you receive counseling as a requirement. This makes it safer for the reverse mortgage program and YOU.
Singe Purpose Reverse Mortgage
The first type of reverse mortgage is a single-purpose reverse mortgage. This type of reverse mortgage is generally going to be your cheapest option as it is offered by some state, local government, and non-profits. Because of the lower fees, this loan is going to be a good option for homeowners with low or moderate income.
The single-purpose reverse mortgage lender will specify exactly what the funds from this loan can be used for. Hence the term, “single-purpose.” Examples of what it can be used for are home repairs/improvements and property tax.
Proprietary Reverse Mortgage
The second type of reverse mortgage is a proprietary reverse mortgage. These loans are “private loans” created by the companies offering them. Generally, these loans may provide you a larger amount of money if you have a higher valued home with a small mortgage.
This type of loan can be an option if you purchased a long time ago and the property has greatly appreciated since then.
Home Equity Conversion Mortgage
The final type of reverse mortgage is a home equity conversion mortgage (HECM). These are federally insured reverse mortgages where you MUST meet with a counselor from an independent housing counseling agency.
Seeing a counselor will be a good idea especially if your financial knowledge is limited. The counselor will explain the costs, fees, financial implications, alternatives, and payment options.
Factors that can influence how much you can borrow include your age, appraised value of home, current interest rates, property taxes, and homeowner’s insurance. The lender will assess your financial condition to determine how much to lend you but generally the more equity in the home the more you will be able to borrow.
Finding a Suitable Lender
Now that you know the basics of a reverse mortgage and you have decided it is right for you, it is time to shop around! Lenders, like any type of business, will have pros and cons to each of them.
Some lenders will specialize. Other lenders will have great customer service. Some lenders you just won’t click with. That’s ok! When looking around at different lenders also keep in mind the options, terms, and fees. Ask lots of questions and take notes!
Sounds great, right?! Unfortunately, like any type of financial product/transaction you need to be careful of unscrupulous people who may try to take advantage of you.
- Some contractors have been known to recommend a reverse mortgage to you so that you can pay home repair bills.
- Others have been known to falsely claim that the Department of Veterans Affairs offers a “no payment” reverse mortgage; the VA does not.
Only you can determine what type of reverse mortgage (if any) is best for you. Take your time, make sure you understand everything, and then make a decision.
Keep in mind that if you do go through with the process and sign the paperwork for the reverse mortgage, you have 3 business days to cancel the loan and get your money back.
You must notify the lender in writing through certified mail and then you will receive your money back within 20 days. Hopefully, it won’t come to that and you receive the money you need to pay your bills.
(This article is for information purposes only. You should seek the advice of licensed financial professionals as this article does not constitute financial advice for your unique personal situation.)
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