Top Reverse mortgage pitfalls

Here are the top three reverse mortgage pitfalls to lookout for. You need to be aware of some dangers.

1) If you have to go to a hospice, nursing home or intend to live in another home and use the house as a second home the bank will call the debt due. This is definitely something you want to consider before taking out a reverse mortgage.

2) It’s easy to be lured into an adjustable rate because lower interest rates in a reverse mortgage have higher monthly payments. If the interest rate increases your payment decreases, as does the time frame you have to draw on the mortgage. But adjustable interest rates are a gamble and Las Vegas wasn’t built on winners.

A considerable downside to reverse mortgages is the high up front costs. This cost can be compensated by a lower interest rate over time, but some seniors choose other options to draw on their home equity. Some reverse mortgage closing costs s are negotiable, e.g the origination fee, and you should be able to work with them on these costs.-

3) Most of the time you will be shown the monthly amount you will receive each month BEFORE the escrows are taken out. This means that you could sign up expecting to get $900 per month and only receive around $700. Make sure you are given the monthly payment LESS your escrow payment. Like most mortgages you will usually be given the option to escrow or not to escrow, however the bank has a vested interest in your home. Meaning if you do not maintain your insurance and taxes as they deem responsible they can call the loan or force an escrow account on you.”

Many lenders also want to make sure the home is kept in good condition and you should make sure to set aside some money to take care of basic upkeep of the home.  Ask the loan officer what the lenders policy is on maintenance and repair. You may want to take enough money up front to have future repairs taken care of so that your monthly payment stays the same.

Reverse Mortgages can be a very valuable tool for a seniors retirement plan, however, that is not to say they are perfect and the three things in this article are a few of the things that you should consider.

 

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Reverse Mortgage – Yes or No.

The main reason people use a reverse mortgage is that they get to stay in their home for as long as they wish. If home prices rise at a significantly higher rate than interest on the loan, then reverse mortgages can be affordable, but prices don’t always rise. Another reason people use reverse mortgages is that you can usually get one if you have equity in your home, regardless of your credit. This may be a reason for people with poor credit to use them, but it doesn’t mean they are the best option for everyone.

Interest rates tend to be adjustable, as the duration of the loan is unknown. Rates are reset on a regular basis, as often as every month.

Discuss of 5 questions to ask before considering a reverse mortgage, listed below.

1. Do you really need a reverse mortgage?
2. Can you afford a reverse mortgage?
3. Can you afford to start using up your home equity now?
4. Do you have less costly options?
5. Do you fully understand how these loans work?

Reverse mortgages are one option, but for many people there may be more affordable alternatives.

Many homeowners, particularly those with good credit, can often find less expensive alternatives.

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Types of Reverse Mortgages

Here are three kinds of Reverse Mortgage:

Home Equity Conversion Mortgages (HECM)

It is administered by the U.S. Department of Housing and Urban Development (HUD). This program is often called a HUD or FHA reverse mortgage.
FHA’s reverse mortgage program collects funds from insurance premiums charged to the homeowners. An upfront insurance premium of 2% is charges based on the maximum amount that can be borrowed, with an annual premium of 0.5% that is paid on a monthly basis for the life of the loan.
 
Home Keeper Reverse Mortgage Loan
This program is administered by Fannie Mae and is similar in many ways to a HECM. However, the key differences are that more property types are eligible, the maximum amount that can be borrowed is higher, singles can borrow more though couples less and a line of credit does not grow, unlike a HECM.
Any broker who sells the Home Keeper program must also offer the HECM program. Both require that the borrower receive information and counseling from an independent third party.Jumbo Reverse Mortgage Loan
These are proprietary programs set up and run by private companies. The biggest attraction of these schemes is that there is no maximum amount that can be borrowed; the limit is set by the value of the home. Owners of high-value homes who want to unlock as much cash as possible would be best accommodated by a jumbo reverse mortgage. However, the cost of these is higher, so a potential borrower should fully understand the charges involved.

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HECM Reverse Mortgage

For over 90% of all loans accounts HECM Reverse Mortgage Loan.
Its popularity is mainly because it is insured by the US government using the FHA insurance scheme. HECM stands for Home Equity Conversion Mortgages and is administered by the U.S. Department of Housing and Urban Development (HUD). This program is often called a HUD or FHA reverse mortgage.
The maximum amount that can be borrowed is based on the value of the equity in the home, its location, current interest rates and the age of the borrower(s). At present the maximum amount that can be borrowed varies from $200,160 to $362,790.
The property must be a single family dwelling or two-to-four unit. Some other types of dwelling are also eligible such as, townhouses, detached homes, units in condominiums and some manufactured homes.
FHA’s reverse mortgage program collects funds from insurance premiums charged to the homeowners. An upfront insurance premium of 2% is charges based on the maximum amount that can be borrowed, with an annual premium of 0.5% that is paid on a monthly basis for the life of the loan.
There are 5 payment plans to choose from, all of which can be changed whenever the borrower wishes – a small charge is made for doing so.

Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
Term – equal monthly payments for a fixed period of time.
Line of Credit – unscheduled payments or in installments, at any time and any amounts until the line of credit is exhausted – this option is not available in Texas.
Modified Tenure – combination of line of credit with monthly.
Modified Term – combination of line of credit with monthly payments for a fixed period of time.

 

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It is a nice way

It is a nice way to leave an estate mess for your loved ones, who won’t feel quite so loved anymore. Not everyone has children. There are a lot of singles or childless couples out there. But if you have nobody to leave your estate to, this allows you to take advantage of the equity while you are still alive. With a reverse mortgage you just take advantage of your home value to enjoy life a little more during the last years or spend money (which are really your own because you get the money for your house).
Seniors who are good candidates for a reverse mortgage could get, on average, $72,128. These funds could be used to pay for a wide range of direct services to help seniors age in place, including home care, respite care or for retrofitting their homes.
On other side a lots of adult children of seniors are proud of their parents’ decision to take a reverse mortgage. Parents have chosen to remain independent, and to spare their children from having to “take care” of them during the years.

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Reverse mortgage – important points.

There are important points to consider about reverse mortgage:The homeowner doesn’t need good credit to obtain a reverse mortgage.The government or the bank does not own your home, nor will they ever.The reverse mortgage loan will pay off your existing mortgage if you have one.You will never have to make a payment of any kind toward the principle or interest.The proceeds do not affect your Social Security, Medicare, or any other benefits you receive.The proceeds are income tax free, because they are not considered income.Your estate nor your children will ever have to pay any extra money… ever!  With a reverse home mortgage, you get all the benefits of selling your house and all the benefits of getting a home equity loan – but you can still live in and retain ownership of your home and you don’t have to pay back the loan. No matter how you structure a reverse mortgage, you typically don’t pay anything back until you die, sell your home, or permanently move out.The only big disadvantage of a reverse mortgage is the high closing cost – which is only problematic if you plan to stay in your home for a short period of time.

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Reverset Mortgage Restrictions

There are three types of reverse mortgages and all have the same eligibility requirements. You must be at least 62, live in, and own, your home and sign a contract. You must also have equity in your home and the inherent interest rate is based on what the lender is currently charging (more about this later) on non-reverse mortgages. The lender, by the way, will also have your property appraised for which you may or may not be charged. There are no income restrictions such as those imposed by Social Security and most are tax free since they do not involve additional features such as an attached annuity. They also do not affect your social security benefits nor your Medicare entitlements.

 You can receive fixed monthly cash advances for a specified period or for as long as you live in your home. Or, if you choose, you can receive a line of credit. A line of credit allows you to draw on the loan proceeds when you want and how much you want. The HECM allows a combination of the two choices. You can receive a monthly payment plus a line of credit.

Reverse mortgages are insured by the Federal Housing Administration. Borrowers must be 62 or older and are required to meet with a HUD-approved counselor to consider alternatives to the loan.

The amount homeowners can borrow depends on the interest rate, the home’s value and their age. On average, borrowers come away with between 45 and 65 percent of the equity in their homes, according to Bank of America. The remainder is used to pay the future interest and the closing costs.

Reverse mortgage closing costs — which are higher than those on a regular mortgage — include a mortgage insurance premium, which is 2 percent of the home’s appraised value or the FHA lending limit for that county, whichever is lower. Borrowers also pay a 2 percent origination fee to the lender. Then there are other costs, such as the appraisal, title fees and other charges, which can total anywhere from $1,000 to $1,700 or so, depending on the lender. Most borrowers roll these closing costs into the loan. For instance, a 70-year-old homeowner with a paid-off house worth $200,000 in south Charlotte could get just over $124,000 in a lump sum from a HUD-insured reverse mortgage, according to the AARP’s reverse mortgage calculator.  Borrowers can choose lump sums, monthly payments, a credit line or a combination.

Customers pay back the loan when they sell the house or die and the house is sold for them. They can never owe more than the value of the home. If it sells for more than the amount of the loan, their heirs get the excess. If it sells for less, FHA makes up the gap to the lender.

The homeowner must maintain the house and pay taxes and insurance, or it’s possible the lender could foreclose.

Borrowers who close on a reverse mortgage have three business days to change their minds.

— Sources: The Federal Housing Administration; Bank of America; area lenders

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What is a reverse mortgage?

 For those over the age of 62 and who own at least 75% of the equity in their home, a reverse mortgage allows them to cash out the equity through the receipt of a monthly term payment or access to a line of credit to draw upon.

The normal costs of home ownership continue-real estate taxes, homeowners insurance, home repairs, and mortgage insurance just for starters need to be paid.
AGE BONUS The older you are when you apply the more money you can get. An 80 year old will get more than a 65 year old.
MEDICAID RAMIFICATIONS Depending on where you live (each state is different) a reverse mortgage could have a negative impact on Medicaid eligibility.
BUT!
As baby boomers near the age of retirement actually percentage wise very few of them have the financial ability to pull it off comfortably. A reverse mortgage may enable literally hundred of thousand of homeowners to live comfortably in retirement!
Reverse Mortgages have become increasing popular in the last several years and will only grow in popularity as the baby boom market looks for ways to finance their retirement!

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