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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Think twice before getting

Reverse mortgages are designed for older homeowners who have a house with equity, and they want to unlock that equity and turn it into cash so they can use it for other purposes, like home repair or to pay off other debts.With a reverse mortgage the homeowner borrows money, but does not have to repay it as long as they live in their house, so it can be used as a form of debt consolidation.Each month interest is added to the principal amount of the loan, and when the homeowner moves, they either repay the loan, or the house is sold and the proceeds go to the reverse mortgage lender.While a reverse mortgage may be a good idea for some people, here are five reasons a reverse mortgage may not be a good idea for debt consolidation loan purposes:– Reverse mortgages are much more expensive than traditional mortgages, so a traditional mortgage may be a better method of debt consolidation.– Reverse mortgages are a form of debt; many older people want to avoid debt, particularly as they get older, so repaying debt may be a better option than debt consolidation.– Reverse mortgages must be paid off upon the death of the homeowner, or if the borrower has not lived in the home for 12 months. This could be an issue if the borrower is placed in a nursing home and then recovers, only to find the home sold.– While regular Social Security and Medicare benefits are not effected, other programs such as Medicaid and Supplemental Security Income (SSI) may be affected.– There are significant up front costs, so reverse mortgage are generally only a good idea for people who intend to live in their homes for at least five yearsIn general, reverse mortgages have advantages and disadvantages, and proper research is required before determining if a reverse mortgage makes sense for you

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When refinancing your Reverse Mortgage might make sense?

Now with home values up and interest rates low it might make sense to refinance a Reverse Mortgage. But it is  depending on your situation. HUD adjusts the county lending limits to keep pace with increases in home values every year, so it’s possible that not only has your home increased in value but the amount of money available has gone up as HUD changes the lending limits.This may not always be the case and more than likely homes won’t appreciate quite as fast as they have in the past. Reverse Mortgages base the amount they will lend to you on the assumption that your home will go up in value every year, so if your home goes up faster than they are assuming you won’t actually go through your equity like you think.Of course every situation is unique and it doesn’t always make sense to refinance a Reverse Mortgage. If you are only planning on staying in the home for a short period of time or if you do not need the extra cash, or if you are concerned about using to much of the equity in the home then refinancing may not be the right thing for you at this time. Refinancing a Reverse Mortgage can provide you with a lot of extra benefits but it should only be done if you really understand the reasons for doing so.

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A good idea only for…

Reverse mortgages are good ideas only for those homeowners who have paid off, or almost paid off, their traditional mortgages. If you have not completely paid off your existing home mortgage, you will have to use some of your reverse mortgage proceeds to do that, but whatever is left is yours to spend as you like.

You should keep in mind that you will be paying interest on all the money you get from your reverse mortgage loan. You must live in that home for at least half of every year. Either you or your spouse, if you are married, must be 62 or older, and your home itself must be eligible for a reverse mortgage loan. If the lender to whom you are speaking is not upfront about all of these requirements, take your business to someone else. Don’t be afraid to talk to several lenders, until you find the one with whom you are most comfortable. You should, in fact, make a point of doing so.

Your reverse mortgage will not have to be repaid until you move out, sell the home, or the last of its owners dies. But you will have to keep your home in good condition, pay your property taxes on time, and maintain your insurance, just as you have in the past. Knowing how reverse mortgages work, and what you will be responsible for, will save you from the heartache of dealing with unscrupulous lenders!

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Some reasons to take out a reverse mortgage

Some reasons to take out a reverse mortgage:

You are kept on the title as owner of the property and will always own the property till you decide to sell. 

You can have a mortgage and still qualify for a reverse mortgage. You will pay off the current mortgage with your new reverse mortgage and will be getting rid of the previous mortgage payment. You must have enough equity to pay the mortgage off completely and you will have to use some of your available cash to do so.

All of the costs, whether closing costs or interest, are financed. That means there are few out-of-pocket expenses at any point in the reverse mortgage.In most cases the reverse mortgage has a lower rate than the current conforming fixed rate. The HECM product’s interest rate is set by the Federal government.FHA/HUD reverse mortgages are designed specifically so that you can’t outlive the loan. When you get the reverse mortgage, the lender will charge you 2% to purchase mandatory FHA mortgage insurance. That insurance guarantees that even if you live to be 100, you can never owe more than the value of your home and you can never be forced to leave.A reverse mortgage is unlike a home equity loan that may have many requirements such as high income, low debt, and good credit that a reverse mortgage does not.

A reverse mortgage usually has significantly lower interest rates.

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Little equity, risk of foreclosure…

Homeowners at risk of foreclosure with little equity in the property are able to do what’s known as a “short refinance” to allow the homeowner to qualify for a Reverse Mortgage. Even if you think you don’t have enough equity in your home you may be able to work out a deal with your lender to allow you to pay less than you owe in order to get into a Reverse Mortgage. It’s cheaper for the lender. Instead of going through all the costs of foreclosing, it is just simply easier for the lender to forgive part of the loan in order to quickly get their money back. So as home values continue to fall it does not mean that you are unable to get a Reverse Mortgage. It may be that your home is more than the county limits anyways, or it may be that your lender is willing to forgive some of the loan balance in order to help you out either way there are options available and with a little creativity and a knowledgeable loan officer you should be able to make your Reverse Mortgage work, even if the housing market is falling to pieces on your doorstep.

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Declining home values and Reverse Mortgage

What effect the decline in the housing market will have on Reverse Mortgages?

If you already have a Reverse Mortgage and if your home values drop too much and the reverse mortgage they have becomes more than the homes value, you have nothing to worry about.  One of the best parts of a reverse mortgage is that once you take one out the terms of the loan cannot change. If you have a line of credit or are receiving monthly payments you will continue to receive them according to the terms of your loan.  If the value of your home drops below the amount due on your loan the lender cannot come ask for more money or file any deficiency judgment in the event they lose money.  Reverse Mortgages have been designed to provide you security for these very circumstances. If you are contemplating taking out a Reverse Mortgage the declining home values could pose some problems. If you in an area that has been hit pretty hard by the real estate downturn then there is a chance the amount of equity in your home will no longer qualify you for a reverse mortgage. Some of the hardest hit areas are places where the average home value is more than the maximum HUD limits anyways so it might not actually change anything for you.

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Loan balance and equity after years

 Reverse Mortgage, especially now with such low interest rates, does not involve giving up all of your equity to the bank.  Equity Sharing programs are beginning to be promoted by some companies, however, these are not Reverse Mortgages, and should be considered very carefully with an attorney and tax consultant.  True FHA insured Reverse Mortgages, and certain proprietary Reverse Mortgages (jumbo Reverse Mortgages, that are not FHA insured) work just like normal loans, except there are not any mortgage payments that need to be made. 

People cannot qualify for a reverse mortgage unless they have a significant amount of equity in their home, so it takes a long time to actually use up all of your equity.  In many cases, the amortization works out so that there is equity left in the home even 20 to 30 years after the loan is taken out.  All of the equity that is left in the house when the homeowner either moves out of the house or passes away can still be willed to heir.

You should ask your loan officer for an amortization schedule that will show you how the loan balance adds up over time, and how this affects the remaining equity in the home.  This is a great tool to use when considering the effects of a Reverse Mortgage on you and your family.

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