What Is A Reverse Mortgage Loan?
When it comes to managing your finances after retirement, there’s no one-size-fits-all approach. Due to the rising health and long-term care costs, more and more seniors are supplementing their income with a reverse mortgage loan. This is a great option for some people, but that doesn’t necessarily mean it’s a good call for you. If you’re on the fence, it’s important to do your research and understand the facts about what is a reverse mortgage loan.
Here are some tips to help you out:
The Basics of a Reverse Mortgage Loan
So what is a reverse mortgage loan? It’s really just a type of home equity loan. It’s reserved specifically for older homeowners.
Those who qualify for a reverse mortgage are borrowing money against the value of their home. Instead of being paid off with monthly mortgage payments, the loan is only repaid if the borrower dies or permanently moves out.
Reverse mortgages have been around in various forms since the 1960s. They’ve become more popular in recent years as a retirement planning tool for older homeowners. Many customers have also turned to them as an option for paying for long-term care.
How Do They Work?
You can receive the money from the loan either as a line of credit, a lump sum, or in fixed monthly payments.
When you move or pass away, the lender will sell your home to pay back the loan.
If there is any equity left over once lender fees are paid, the equity goes to you or your heirs. The Federal Trade Commission also ensures that you’ll never owe more than the value of your home in the event that you “outlive” your loan, meaning you receive more payments that the house is worth.
You do not have to pay back the loan unless you move or die. But, you do still have to pay for property taxes and homeowners insurance. You’re also responsible for keeping your home in good shape.
If you fail to pay taxes and or insurance, or if you stop maintaining the home, your loan can become due.
Anyone seeking a reverse mortgage loan must meet the following criteria:
- Must be at least 62 years old
- Must own your home outright or have a low mortgage balance
- Must have the resources to pay property taxes and insurance
- Must continue living in the home
- Must receive loan counseling before approval
- Must not be delinquent on federal debt (income taxes, small business loans, federal student loans, etc.)
There are also limitations of the types of homes that borrowers can get a reverse mortgage on. The home must be:
- A single family home or a 2-4 unit home (with at least one unit occupied by the borrower)
- A HUD-approved condominium or townhouse
- A manufactured home that meets all FHA requirements
Rental homes, vacation homes, and homes that have been unoccupied for a year or more are not eligible for reverse mortgages.
Types of Reverse Mortgages
Reverse mortgages come in many different forms, including the following:
Single-Purpose Reverse Mortgages
Some municipal and state government agencies offer single-purpose reverse mortgage loans, as do some non-profit organizations.
These mortgages appeal to low- and moderate-income homeowners who need to use the equity in their home for one specific purpose.
For this type of reverse mortgage, a lender will decide how it can be used. Homeowners often rely on them to pay property taxes or make repairs to their homes.
A single-purpose reverse mortgage comes with fewer fees and less interest. It also is not federally insured.
Home Equity Conversion Mortgages
A home equity conversion mortgage is the most common type of reverse mortgage loan. They are guaranteed by the federal government through the Federal Housing Administration.
There are no income limitations or medical requirements. Also, there no restrictions on how homeowners can spend the money they receive from this type of loan.
The main drawback is the fact that the maximum loan amount is limited. The current limit, as of January 2017, is $636,150.
Proprietary Reverse Mortgages
A proprietary reverse mortgage is a private loan backed by an issuing company. With this type of loan, borrowers can get more money than the federal limit. But, these loans are not federally insured and usually come with higher costs.
They are most beneficial to homeowners with higher-value homes.
Who Will Benefit Most from One?
Watch This Video And Learn More About What Is A Reverse Mortgage Loan
Reverse mortgages can sometimes be touted as quick fixes that will take care of all a borrower’s financial issues. This is definitely not the case, though.
Generally speaking, the following are the people who will benefit most from these loans:
- Those who don’t plan on moving
- Those who can afford to maintain their home and pay property taxes and insurance
- Those who simply want to supplement their income or have a rainy day fund available
If none of the above points apply to you, you may want to reconsider a reverse mortgage. Otherwise, it may end up complicating your financial situation.
A reverse mortgage loan isn’t for everyone. Some of the common roadblocks that borrowers face during the application process include:
The Counseling Requirement
Some borrowers may hesitate by the requirement to meet with a reverse mortgage counselor.
A counselor’s job is to explain the various costs that accompany a reverse mortgage loan. They will also help you understand your options for keeping up with the costs of your home.
The counseling requirement helps protect those who might not be financially savvy. Reverse mortgages can be complicated, so it’s important to understand what you’re getting into ahead of time.
Mortgage counseling usually costs around $125 dollars. Some counselors will wave this fee, but you’ll have to seek them out.
Fees and Charges
Another big deterrent relate to the costs associated with a reverse mortgage. Some of the fees and charges include:
Mortgage Insurance Premium (MIP): This guarantees that borrowers will receive their loan advances even if the loan servicer goes out of business.
Third party charges: These include closings costs for appraisals, title searches, inspections, and credit checks.
Loan origination fee: This is the processing fee paid to the lender for putting the loan in place.
Servicing fees: These vary from lender to lender, and cover things like sending checks and account statements, as well as customer service fees.
The actual cost of these fees is determined by several factors, including the following:
- Borrower’s age
- The value of the home
- The property’s ZIP code
- The existing mortgage balance or liens
- Borrower’s number of expected years in the house
- Borrower’s life expectancy
Some borrowers roll these fees into their loan if they can’t afford them. This is a viable option, but the fees will accrue interest as part of the total loan balance.
Choosing a Reverse Mortgage Lender
If you’re considering a reverse mortgage, shop around to find a lender who will give you the best rates.
Reverse mortgages have received a bad reputation in the past because of dishonest lenders. It’s important to do your research to avoid scam operations.
These tips will help you find the best lender for your particular needs.
Use a Credible Search Tool
Don’t just type “reverse mortgage lender” into Google and go with the first person who pops up.
Instead, use the Find a Lender tool provided by the National Reverse Mortgage Lenders Association (NRMLA). The Lender List from the U.S. Department of Housing and Urban Development is a reliable source too.
These tools are great starting points that will help you find credible lenders in your area and learn more about what is a reverse mortgage loan.
Get a Personal Recommendation
Speak to your financial advisor or CPA before moving forward with a reverse mortgage loan. These professionals will be able to adequately explain to you what is a reverse mortgage loan. In addition, they are familiar with your financial situation and will be able to make a recommendation based on what will be best for you long term.
If you can’t speak with a professional, use the Consumer Financial Protection Bureau’s Consumer Complaint Database. This will give you an idea of which lenders to avoid.
Ask the Right Questions
When you do meet with a potential lender, make sure you ask them the following questions to decide if they’re right for you:
What is a reverse mortgage loan and what are the drawbacks?
How many years of experience do you have with reverse mortgages?
How many have you closed?
How do I decide if a reverse mortgage is right for me?
This last point is very important for deciding whether or not a lender is trustworthy. A credible loan officer will be honest about the drawbacks of a reverse mortgage. Also, he won’t try to pressure you into one without acknowledging them.
Take Your Time
Finally, take your time comparing potential lenders. Don’t let anyone pressure you into rushing through the process.
A reverse mortgage loan is a big decision, and you should take as much time as you need to decide if it’s right for you.
Do you feel like you understand what is a reverse mortgage loan? Do you have any other questions? Comment below and let us know!
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