|Reverse Mortgage: What Is It and How It Works|
|RISMEDIA, Tuesday, May 24, 2016— (TNS)—Reverse mortgages have become the cash-strapped homeowner’s financial planning tool of choice.|
The first Federal Housing Administration-insured reverse mortgage was introduced in 1989. Such loans enable seniors age 62 and older to access a portion of their home equity without having to move.
Reverse Mortgage: What Is It?
A reverse mortgage is a type of home equity loan for older homeowners. It does not require monthly mortgage payments. The loan is repaid after the borrower moves out or dies. It’s also known as a home equity conversion mortgage, or HECM.
Who Would Benefit
Steven Sass, program director at the Center for Retirement Research at Boston College, says a reverse mortgage makes sense for people who:
“There are a lot of motivations leading into it,” Bell says. “In some cases, people may have an immediate need to pay off debt, or they may have had some unexpected expenses like a home repair or health care situation.”
The bank makes payments to the borrower throughout his or her lifetime based on a percentage of accumulated home equity. The loan balance does not have to be repaid until the borrower dies, sells the home or permanently moves out.
Reverse Mortgage Basics
How Much Can You Get?
According to the National Reverse Mortgage Lenders Association, or NRMLA, several factors determine the amount of funds you are eligible to receive through a reverse mortgage.
Factors That Influence Loan Amount
Many people in retirement use it to supplement their income, pay for health care expenses, pay off debt or pay for home improvement jobs.
The method of payment collection depends on the type of mortgage. Retirees with an adjustable-rate mortgage can collect their payments on a reverse mortgage as a lump sum, fixed monthly payment, line of credit or some combination.
Holders of fixed-rate mortgages receive a lump sum.
A reverse mortgage wouldn’t be the best option if you can’t maintain the costs associated with the home, even without a monthly mortgage payment.
If you die or the home isn’t the primary residence for more than 12 months, the loan comes due, which means either you or the estate has the option to repay the loan or put the home up for sale to settle it.
Homeowners interested in taking out a reverse mortgage are required to receive mandatory (free) counseling by an independent third party, including an agency approved by the Department of Housing and Urban Development or a national counseling agency such as AARP. These organizations help homeowners review alternative options.
“As you get older, it gets harder to grasp some of the terms in these kinds of transactions, so it’s not a bad idea to have someone younger who you trust, like an adult child, involved in the process,” says Phil Cook, a CFP professional in Manhattan Beach, Calif.
About the Costs
If you decide to proceed with the loan, you can expect to pay higher-than-average closing costs based on the value of your home, including origination fees, upfront mortgage insurance and appraisal fees. The interest rate you pay is also generally higher than that for a traditional mortgage.
Anyone who takes out a reverse mortgage remains responsible for paying property taxes, insurance and repairs on their home. If you fail to comply, you may be required to repay your reverse mortgage early.
Spending the equity in your home, of course, also diminishes the value of your estate — leaving you less to pass along to your heirs down the road.
“Always explore all other sources of income first before tapping into your home equity,” advises Cook. “Liquidate your portfolio and cut down on your living expenses. If you still don’t have enough, a reverse mortgage may make sense.”
To locate a Federal Housing Authority-approved lender or HUD-approved counseling agency, you can visit HUD’s online locator or call the Multifamily Housing Clearinghouse at 1 (800) 569-4287.
Distributed by Tribune Content Agency, LLC
Tuesday, May 24, 2016