Reverse Mortgages:
Positives and Potential Pitfalls
If you are a senior citizen, own your own home and are looking for income, you may want to consider the option of a reverse mortgage.
What Is A Reverse Mortgage?
A reverse mortgage is basically a home loan that allows a homeowner, 62 years of age or older, to convert a portion of the equity in his or her home into cash payments. After years of paying your mortgage and building equity in your property, a reverse mortgage allows you to have the equity paid back to you in cash -- tax-free. Unlike a traditional home equity loan or second mortgage, repayment is not required until the borrower no longer uses the home as the principal residence.
You may qualify for a reverse mortgage even if you still owe money on an existing mortgage. However, the reverse mortgage must be in a first lien position, so existing indebtedness must be paid off. You can pay off the existing mortgage with a reverse mortgage, money from your savings, or assistance from a family member or friend.
How Does It Work?
Let's say you owe $100,000 on an existing mortgage. Based on your age, home value, and interest rates, you qualify for $125,000 under the reverse mortgage program. Under this scenario, you will be able to pay off the entire existing mortgage and still have $25,000 left over to use as you wish.
If, however, you only qualify for $85,000, then you would need to come up with $15,000 from your own savings to get the reverse mortgage. Even then, all the money from the reverse mortgage will have been used to pay off the existing mortgage. On the other hand, you won't have a monthly mortgage payment anymore.
Cash from a reverse mortgage can be paid out in several options including one lump sum payment; a regular monthly cash advance check; a credit-line account that lets you decide when how and how much you need or a combination of all three. No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home.
Are There Restrictions On How You Can Use The Money?
No. Whether you want to pay for your grandchildren's college, take a dream vacation or just use the money as an income stream, the choice is up to you.
What Are The Usual Fees Involved?
Fees are based on the lower of Appraised Value or Maximum Financing as allowed by the FHA ($417,000).
An origination fee is calculated from this amount, 2% of the first $200,000 and 1% of every dollar over $200,000 up to a maximum origination fee of $6,000. Other standard closing costs will vary depending on the lender, but these generally run 1% to 1.5% of the loan size.
A “servicing set aside fee” of approximately $4,000 to $5,500 (depending on the loan size) is charged when the reverse mortgage is established, and the monthly loan servicing fee is drawn from this pool of money. The typical monthly fee is $35.
Borrowers are also charged a mortgage insurance premium (MIP), equal to 2 percent of the maximum claim amount, or home value, whichever is less, plus an annual premium thereafter equal to 0.5 percent of the loan balance.
The MIP guarantees that if the company managing your account – commonly called the loan “servicer” – goes out of business, the government will step in and make sure you have continued access to your loan funds. Furthermore, the MIP guarantees that you will never owe more than the value of your home when the loan must be repaid.
Is Your Home At Risk?
The only scenario in which you could lose your home is if you fail to make your property tax payments and other scheduled maintenance fees.
Is A Reverse Mortgage For You?
As the old saying goes -- there is no such thing as a free lunch. The cost of establishing a reverse mortgage is not cheap. Fees are paid to lenders, brokers, insurers and other intermediaries. In addition to the fees, the younger you are when you take out the loan, the more you will owe.
Reverse mortgages are best suited for senior citizens who plan to remain in their homes for several years. With the initial cost of a reverse mortgage more expensive to set up than home equity loans, the longer you remain in your home, the more cost effective it is.
Make sure you do some comparison-shopping to assess whether a reserve mortgage is right for you. In many instances, it can be.
Comparison-shopping remains the best way to assess the wisdom of a reverse mortgage. Look at more than one mortgage offer and, for each, calculate the costs and the amount of money that you would collect.
Keep in mind: a reverse mortgage is one but not the only option you have to raise cash when you need it. And if you do conclude that a reverse mortgage makes sense for you, be sure to shop around for the best terms and lowest fees.
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CREDIT SCORES
Did You Know?
You can get a free credit report once every 12 months without hurting your score? This service was created by the three nationwide consumer credit reporting companies, Equifax, Experian and Transunion in accordance with the Fair and Accurate Transactions Act (FACT Act).
To learn more or to get your free credit report, go to AnnualCreditReport.com.
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By: RJ Matson, The St. Louis Post Dispatch, courtesy of Cagle Cartoons
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