Thursday, 09 April 2020

Reverse Mortgages: What You Need to Know

Written by Posted On Tuesday, 14 January 2020 08:24
What Should I Know About a Reverse Mortgage? What Should I Know About a Reverse Mortgage?

Reverse Mortgages Explained

Mortgages give home buyers the purchasing power to secure the home they want. Reverse mortgages, as the name would suggest, do the opposite. It allows the homeowner to withdraw money from the value of their house.

It is designed for people aged 62 and older, which own all or most of their home and can give people a crucial injection of money when they need it most. Perhaps they don't have enough funds to enjoy their retirement, or they need to cover the costs of healthcare, whatever the reason, it can be a useful option.

Before going with this kind of loan option, however, it is crucial to understand the pros and cons of a reverse mortgage. Without a doubt, there are upsides and downsides to this type of mortgage.

The Federal Government insures the popular Home Equity Conversion Mortgage (HECM). This reverse mortgage is available through lenders approved by the FHA.

What to Expect From a Reverse Mortgage

There are, naturally, rules about how much you can borrow through this method. It does depend on the age of the youngest person named in the agreement, whether they are the owner or the spouse. The appraisal value of the home and interest rates also factor into the amount which can be borrowed. This cannot exceed $726,525 based on the figures for 2019.

When entering into an agreement like this, you have several options for how to accept the funds:

  • Monthly payments over a fixed period or as long as one of the borrowers remains resident in the property
  • A borrowing limit which can be used for whatever purpose
  • Both fixed monthly payments and a borrowing limit

The amount of money in the reverse mortgage will only have to be repaid to the lender when the borrower no longer occupies the home. Also, the borrower will never have to pay back more than was initially lent to them. If the value of the house is higher than the mortgage amount when it is sold, the extra money will go to the borrower or their heirs.

Lots of heirs wonder how to sell a house with a reverse mortgage. It really isn't much different than a traditional sale. The article at Maximum Real Estate Exposure does an excellent job explaining the process.

What are the Advantages of Taking Out a Reverse Mortgage?

It is a loan that doesn't need monthly payments to secure. It frees up the equity in your home at a time you might need it. A spouse of the borrower can remain in the house after the borrower has died.

What are the Disadvantages?

The owner will still need to maintain the home and keep up with any taxes due. They will also be required to pay fees and closing costs, which can be substantial. This type of mortgage means that you are borrowing against the value of your home, meaning that there will be less inheritance for your heirs. It can be problematic if you put yourself in a financial hole that causes a foreclosure.

Is a Reverse Mortgage Expensive?

The closing costs involved when taking out this type of mortgage are significant but can be financed as part of the loan. This means that you won't need to find this money when signing on the dotted line. Other costs are involved as well, these include:

  • Mortgage Insurance Premium. Typically, this is 2 percent at closing with 0.5 percent per year.
  • Origination fee. The lender will charge 2 percent for the first $200,000 and 1 percent for the value over that, up to a maximum of $6,000.
  • Servicing. A monthly fee can be issued by the lender to maintain your account. This will be no more than $35 per month.
  • Other charges. There will be additional fees at closing for appraisals, inspections, taxes, etc.

Comparing Reverse Mortgages with Home Equity Loans

If you don't meet the requirements for a reverse mortgage, a home equity loan, or home equity line of credit may be an option. These options also allow you to borrow against the value of your home but restrict borrowing to 85 percent of the value.

With a home equity loan, the borrower will be required to pay monthly amounts until the loan is repaid. This makes it difficult for retirees to qualify for, as the lender will want to see a secure income. Quite often, that can be challenging if you are no longer employed.

The interest rates can be better, and fewer fees are payable on home equity loans.

Final Thoughts on Reverse Mortgages

The reverse mortgage fills a purpose for people that find themselves in an awkward financial position. It can be a godsend when living expenses become difficult for retirees. It is also an option for those retirees who wish to get more out of their retirement years, but don't have the funds.

There are downsides; however, if you can't afford the ongoing costs involved with maintaining the house, it may not be a good option. There is also the problem of the loan amount becoming more than the home is worth. If this happens, you could face the risk of having to sign over the property to the lender.

Before choosing to go forward with a reverse mortgage, it makes sense to speak to a qualified financial planner first. Exploring all of your financial options is always essential before making such a significant decision.

When looking for a reverse mortgage lender, you need to do a lot of research. Unfortunately, there are a lot of scammers who prey on the elderly and those who are naive about reverse mortgages. It is vital to do your homework with this type of loan!

Hopefully, you now have a better understanding of how a reverse mortgage works!

Other Helpful Real Estate Guidance

  • What do real estate agents do for me - one of the things that lots of buyers and sellers wonder is what their real estate agent will be doing for them. Is it as simple as finding a buyer or a house? Of course not! In the article at Maximum Real Estate Exposure, you'll find a comprehensive overview of everything a real estate agent does all day long. You will learn what happens behind the scenes that buyers and sellers rarely get to see.
  • What to know about earnest money - do you know what an earnest money deposit is and how it works? In the article at The National Association of Realtors, see a complete explanation of the purpose of earnest money and how it is different from a buyer's down payment.
  • Pros and cons of selling a house to an investor - are you aware of the upsides and downsides of selling a house to a real estate investor? Before jumping into a relationship with a company that buys homes, you should have a firm understand of the risks involved. Find out what to look for when selling your property to an investor.

Whether you are buying or selling a home, it is essential to educate yourself on the process. Researching the topic at hand is crucial. The perfect example is a reverse mortgage where lots of folks are conned by a fast-talking salesman who pushes a product riddled with problems.

About the author: The above article on a reverse mortgage was written by Bill Gassett. Bill is a nationally recognized Real Estate leader who has been helping people buy and sell Metrowest Massachusetts real estate for the past thirty-three plus years. Bill has been one of the top RE/MAX Realtors in New England for the past decade.

His real estate advice has been featured on CNBC, RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame, and others.

Bill covers real estate sales in the following Massachusetts communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

Reach out for his advice anytime.

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Bill Gassett

One of the top RE/MAX agents in New England over the last decade plus. Providing exceptional real estate services to buyers and sellers in the Metrowest Massachusetts area including the following communities: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

See my real estate website at Maximum Real Estate Exposure - one of the most visited real estate sites in Massachusetts.

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