If you are over sixty-two years old, looking for money to pay off your current mortgage, finance home improvement, healthcare expenses or supplement your retirement income, you might want to consider a reverse mortgage. This allows you to convert a part of the home equity into cash without having to sell it or pay additional monthly bills.
There are several types of reverse mortgages. One is the Single-purpose Reverse Mortgage is the least expensive option. This can be used for one purpose only which is specified by the government or a non-profit lender. Homeowners with low or moderate income can qualify for this loan. There is also the Home Equity Conversion Mortgages or HECMs and backed by the U.S. Department of Housing and Urban Development and the Proprietary Reverse Mortgage backed by the companies that develop them.
HECMs and Proprietary Reverse Mortgages are more expensive than conventional home loans and the up-front costs are high. You can consider this, especially if you are planning to stay in your home for a short while or borrow a minimal amount. These loans are widely available, no medical or income requirements and could be used for whatever your purpose.
Before you apply for a HECM, you must consult with an independent councelor from a government-approved housing counselling agency. Several lenders that offer proprietary reverse mortgage also require you for counselling. He or she will explain the financial implications, expenses and alternatives of a HECM and should be able to help you compare the costs of different kinds of reverse mortgages. The amount you can borrow from a HECM or proprietary reverse mortgage depends on some factors such as you age, the type of mortgage, the appraised value of your home and the current interest rates. Generally, the older you are, the more equity you have in your home and the lesser you owe on it means the more money you can get.
Here are some facts of a reverse mortgage that you should be aware:
1. In general, lenders charge a mortgage insurance premium (for federally insured HECMs), origination fee and other costs of closing. They may also charge service fees for the term of the mortgage. Law currently dictates an HECM reserve mortgage origination fees.
2. While it is true that some reverse mortgages have fixed rates, most have variable rates tied to a financial index and they are likely to change with the conditions in the market.
3. The amount owed in a reverse mortgage grows over time. The interest is charged on the balance outstanding and is added to the amount you owe per month. This means that your total debt decreases as the loan funds are advanced into the interest on the loan accrues.
3. A reverse mortgage could use up all or some of your home equity and leave a few assets for you and your heirs. Most of these mortgages have a nonrecourse clause that prevents you or your property from owning more than its value.
4. You will be responsible for insurance, property taxes, fuel maintenance, utilities and other expenses since you retain the title to your property. If you do not pay these and maintain the condition of your home, the loan may become due and payable.
5. If you own a home with a higher value, you may be able to obtain a higher loan but the higher amount you borrow also means higher costs. The key to determine the differences between a HECM and a proprietary loan is to do a side-by-side comparison of their benefits and expenses.
6. You have the right to cancel the reverse mortgage deal within three days for any reason minus a penalty. You have to write a letter to the lender by certified mail and ask for an acknowledgment or return receipt, this will allow you to document that the lender received it a said date. Keep copies of your correspondence. After cancelling, the lender has twenty days to return any amount you have paid for the financing.
Bear in mind that regardless of the type of reverse mortgage you are considering, you should comprehend all the conditions that could make the loan due and payable.