Reverse Mortgages: How Does It Work?

Posted On Thursday, 09 July 2020 20:53

It’s prudent to save up for your retirement nest egg so that you can live comfortably in your old age. However, in today’s economy, it can be difficult to figure out precisely how much you need to save for the future. Plus, unforeseen circumstances, such as grave illness and other urgent situations, may lead you to borrow money from your savings.

There may also be times when the burden of repaying your home loan can be too much, especially when you have medical bills to consider. Fortunately, you can ease your financial burden by applying for support from companies, like Reverse Your Mortgage.

These businesses offer a reverse mortgage, which allows homeowners aged 62 years old and above to convert part of their home equity into cash. The setup is ideal for those who need or want a little boost in their retirement funds.

The Reverse Mortgage Process

In a typical mortgage setup, you borrow a sum to be able to purchase a home. Then, you pay the lender each month to repay the capital that they lent you.

With a reverse mortgage, the lender pays you. They calculate your home equity, which pertains to the market value of your property minus the outstanding balance of the pending payments. Think of it as a tax-free cash advance on the equity.

Generally, you don’t have to repay the reverse loan while you’re still living in your house. You must remember, however, that you should continue paying property taxes, as well as insurance and maintenance costs since you’re still considered as the legal homeowner.

A reverse mortgage is ideal for those who want to:

• Reduce their monthly mortgage payments
• Consolidate their debts
• Free up some money for in-home care
• Conduct necessary home improvements
• Buy a new house
• Supplement their income
• Increase savings or have emergency funds
• Safeguard their home equity against declining markets
• Make their property’s net worth more liquid

If you’re intrigued about a reverse mortgage, or you feel that this lending arrangement is ideal for your situation, here are the steps involved in the process:

1. Assessment

Before anything else, you have to evaluate your finances and make sure that you really need to take out a reverse mortgage to supplement your current funds. Even if the setup seems favorable, you must remember that it’s still a loan, so someone will have to pay back the amount you owe.

While you might not need to repay your debt if you’re still living in your home, you leave a financial burden to your family and loved ones once you pass. They’ll have to take over the responsibility of paying back the lender and may end up selling their inherited property.

This is why taking out a loan, even a reverse mortgage, should be a last resort. Nonetheless, if you feel like you’d get a good deal from this lending arrangement, you should do your research and educate yourself on the benefits, as well as risks that it entails.

2. Paperwork

Once you’ve decided to apply for reverse mortgage and you’ve found a reliable lender, you’ll be asked to fill up forms, whether in person or electronically. The typical process takes approximately 45 days, beginning from the time when you submit your application. However, the steps are different for each lender, so this aspect should be part of your research.

Most eligibility assessments utilize the Federal Housing Administration (FHA) formula. It takes into consideration the homeowner’s age, the value of the property, the remaining balance on the existing mortgage, estimated interest rate, and the principal lending limit.

A few documents that you should prepare for submission include recent copies of your Social Security or Medicare card, valid ID, mortgage statement, tax bill, homeowner’s insurance policy, and deed of trust. You also have to present a death certificate for the deceased property owner whose name still appears on the title.

3. Counseling

Next, you’ll have to speak with a representative of an independent entity to ensure that you understand the conditions that the reverse mortgage loan entails. The agency must have the approval of the Department of Housing and Urban Development to conduct this type of consultation.

The counselor will walk you through the process and help you decide whether this option is the best method for you to supplement your finances or if there’s another better alternative. Moreover, they also aid you in determining where to spend or allocate the loan proceeds.

4. Appraisal

Afterward, the lender will appraise your home’s value to confirm the amount that they can loan you. Another purpose of this stage is to ensure that your property meets FHA standards. The appraisal process is conducted through market analysis of the value of your property and comparing it against similar houses sold in your location.

5. Processing

Once you’ve passed the previous stages, you may be able to process your application. You have to choose from three different types of reverse mortgage loans. These are the following:

• Home Equity Conversion Mortgage

An HECM is the most well-known reverse mortgage loan type. It’s federally-insured and relatively straightforward. If you have a high property value, you can expect a better payout. Moreover, there aren’t any income requirements for this loan.

• Home Equity Conversion Mortgages For Purchases

HECMs for Purchase is another program developed by the FHA to use the funds they received from the reverse mortgage to buy a new home. It was created to aid seniors in relocating or downsizing without having to worry about monthly repayments. Through this, you pay a considerable down payment upfront and apply for a reverse mortgage loan to cover the balance of the purchase price.

• Proprietary Reverse Mortgages

This type is a private loan, so it doesn’t have the insurance and financial backing of the government. The primary appeal of proprietary reverse mortgages is that they have larger loan advances for individuals who own expensive homes.

Moreover, it doesn’t impose a limit on home equity, unlike HECMs that have a threshold of about USD$ 680,000. Another thing to remember is that companies that offer this type of loan only disburse lump-sum payments.

• Single-Purpose Reverse Mortgages

These are the most inexpensive reverse mortgages because you can only spend the funds on a single, agreed-upon use. State or local governments, agencies, and non-profit organizations sometimes offer single-purpose reverse mortgages.

You can use the money for home improvements, like replacing a roof or repairing the plumbing. It can also be utilized for paying taxes or covering an expensive outlay.

6. Fund Disbursal

After going through the process and having your application approved, you just need to wait for the disbursement of the funds. As mentioned above, you can only expect a lump-sum payment method for propriety reverse mortgages. This means that you’ll receive the cash all at once in a single large payment. It’s also the case for fixed-rate loans.

Other types of reverse mortgage loans allow you to receive the funds through:

• Monthly Term Payments - In this arrangement, you get to choose how long you want to receive the funds from the loan. You can opt to get payments over the span of 10 years, for instance, and collect a fixed amount monthly for 120 months. On the other hand, you can also decide to shorten the period to five years for a bigger payout each month.
• Monthly Tenure Payments - For monthly tenure payments, the limit to the payment period depends on the life of your loan. The lender calculates the tenure payment, and you’ll receive that amount each month as long as you stay on a reverse mortgage. This is the option to choose if you don’t want to outlive your proceeds.
• Credit Line - Another way is through a credit line that’s opened for you. With this, you can get access to funds when you need them. It’s great for emergency situations, like hospitalizations and other urgent circumstances. Plus, you’ll only have to pay interest on the amount that you actually use, while the rest of the money will increase in value yearly, similar to a checking or savings account.
• Payment Combination - There are also lenders that allow you to customize your reverse mortgage payout by combining the different payment options. You can go for term or tenure payments while getting a credit line to ensure that you have access to more money for emergencies. Another method is through a lump sum that you can use for home improvements or purchasing a new property and opening a credit line, or have the other half released in monthly installments.

Conclusion

Reverse mortgages are a type of loan that allows seniors, aged 62 and up, to convert their remaining home equity to cash. This lending arrangement is usually used to supplement retirement funds. Nonetheless, it can also be used for purchasing a new house or consolidating debt.

Before you apply for a reverse mortgage, you must assess your finances and make sure that this loan type is the best course for you. Then, you have to file the paperwork and go through counseling with a third-party entity that will guide you on the process.

Next, your home would be appraised, and you have to choose the reverse mortgage loan type that works for your situation. Lastly, once your application has been approved, you must decide on the payment method and wait for the funds to be disbursed.

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