How do I know if a reverse mortgage is a good idea for me?
That is a good question. Unfortunately, too many people rush into getting one and regret it later. This kind of loan can reverse your life for the better or toss it down the chutes. To know more and to see whether you qualify – read on…
What is a reverse mortgage?
A reverse mortgage is a special type of loan that allows older homeowners to borrow against the equity (assets) in their homes. It is called a ‘reverse’ mortgage because instead of making payments to the lender, you actually get money from him (or her). The interest added to this loan naturally accumulates as the months go on until the amount of this loan soon equals the amount of equity that your home is made up of (or corresponds to). So, for instance, the loan amount may have grown to a boggling $10 billion which is precisely the value of your home. Not everyone is eligible for this loan.
How do I know if I am eligible?
Age matters. You have to be at least 62 years old to quality. Your home must be your primary residence and then you must have paid off some, or all, of your traditional mortgage. There are limits to how much you can borrow so if you owe too much (or beyond a certain amount) on your traditional mortgage, you may be ineligible. Your reverse mortgage, too, goes towards paying off the original mortgage – that is, if you’re in arrears.
What do I do to get this reverse mortgage?
The steps are very simple. The Federal Housing Administration (FHA) offers these type of loans through its Home Equity Conversion Mortgage (HECM) program. Its lenders – or counselors – must be approved by the Department of Housing and Urban Development (HUD). You meet with one to discuss how the loan works and how much it will cost you. The counselor will check your home to see whether it is properly managed for you to qualify for this loan.
Facts I should know before getting this reverse mortgage?
Certainly! The reverse mortgage basically means that you are selling your home off to anyone else, so the moment you move out or die, anyone else living in that house -even spouse or close family members – are naturally evicted too. You can avoid that by signing this person, or people, on as co-borrowers – as long as they are at least aged 62.
Know, too, that the Consumer Financial Protection Bureau advises that you think long and hard before entering into such a loan. Rather than using up your home equity, see if you qualify for a state or local program to lower your bills. Or maybe downsize to a more affordable home. Home equity is often the last resource to turn to in a financial emergency, but it may be advisable to speak to both a qualified housing counselor and a trusted financial advisor so that you make the right decision.
Other facts to consider before applying
Are you on a fixed income? If you have little income coming in, you may find yourself in trouble later with being unable to repay the loan. In that case, you may have trouble paying your property taxes and homeowner’s insurance, and you could face foreclosure.
Another thing you should consider is whether you have children or heirs that you want to leave your property to. Taking out a reverse mortgage can jeopardize your ability to leave your home to them. (Neither they or you will be too happy!)
Secondly, consider the amount of time that you want to continue staying in that home. Such a loan only makes sense if you plan to live in your current home for a long time. This is because a reverse mortgage requires you to pay insurance premiums in case your loan balance grows to be more than your home is worth. If you only stay in your home for a short time, you’ll be paying for insurance that you don’t need and the loan balance is less likely to grow to more than your home value.
Reverse mortgages can also have high upfront costs. If you sell your house within a few years, you won’t have gotten as much benefit from those costs than if you stayed in your home for a longer time.
How much does it cost to get a reverse mortgage? (And other money issues)
You’ll pay differently depending on the type of mortgage you choose. So shop around. Also plan beforehand on how you’re going to complete your property taxes and homeowner’s insurance. You don’t want to lose your home or be forced to move out.
In short, consider this: Have you thought about downsizing? How about selling your home and using your money from the sale to buy a more affordable one, you could be more financially secure in the long run. That may serve you better than going into the hassle of getting a reverse mortgage…