How does a reverse mortgage work?

By
Mortgage and Lending with NMLS #384936 NMLS #384936

 

 
 

How does a reverse mortgage work?

 

January 13, 2016

 
 

 

 

 

 

Basically, a reverse mortgage pays you money from the equity you have built up in the value of your home. There are some requirements that need to be met to qualify. We ask some of the most common questions.

 

Why would I choose a reverse mortgage instead of a home equity loan or second mortgage?

BANK LINE OF CREDIT

  • You have to make interest payments if you use the line at least monthly or quarterly

  • The line of credit will usually be due every year or every five years

  • The loan amount is based on your Present Market Value of your home

  • If you borrow on the line, and for some reason cannot make payment, you could be subject to foreclosure

  • The bank LOC is not a non-recourse loan.   If you can’t pay it for some reason, you could be subject to a deficiency judgment

  • The bank LOC is based on your present credit score and your income

  • If you use the line, you have to make payments

  • The bank LOC does not increase in value if your house should decline in value

 

THE REVERSE MORTGAGE LINE OF CREDIT

  • You never have to make payments if you do not wish to.   The loan becomes due when you no longer occupy the property.

  • It is a non-recourse loan (secured only by the property; you and your heirs cannot be held liable for any deficiency)

  • Although you must assure the lender that you can pay taxes, insurance and maintain the home, it is not based entirely on your credi score or income

  • The unused balance on your LOC will increase 5% a year

  • Assume you DO NOT take $30,000 in cash and pay $8,474 up front.

  • If you don’t use the LOC, over 20 years you will have paid $8,474 up front= $423.70 a year.   Your LOC goes from $144,623 to $592,721.  In plain English, the LOC will go up approximately $448,000 or $22,400 a year while only paying only $423 a year.

The LOC option is better than sliced bread, in my opinion.

 

Will my children lose my house when I pass away?

With the new laws related to Reverse Mortgages, losing your estate is no longer a fear. When your pass away, or if you move from the home and it is no longer your primary residence, the cash, interest and finance charges must be repaid. Any negative equity is covered by insurance, so no debt is passed onto heirs or the estate. Any proceeds from the home sale that are above the re-payment amount are paid to the estate or heirs.

 

How do I know if a reverse mortgage is right for me?

Certainly, first, you must qualify. In addition to meeting those requirements, there are a few other suggestions. First, if you don’t plan on living in your home another 3 years, another financing option may be better for you. Second, if you don’t have the ability to care for your home physically or financially, it may not be a good option as you are required to keep up on utility payments, taxes and insurance, as well as maintain or pay to have the property maintained. If you are not sure if a reverse mortgage is right for you, it is best to speak with a reverse mortgage advisor about your situation to discuss your goals and expectations with a reverse mortgage.

 

How much money can I expect from a Reverse Mortgage?

A professional reverse mortgage advisor will be able to provide a more specific answer to this question as it will vary depending a on few factors. First, it will depend on the appraised value of the home. The FHA mortgage limit for Reverse Mortgages is currently $625,500. Second, the amount you can expect is affected by the current interest rates. This means there will be better times than others to get more money out of your Reverse Mortgage. And finally, it will depend on the age of the youngest eligible borrower.

 

How do I get paid from a Reverse Mortgage?

You have several options on how you can receive the equity payment from your mortgage. Options include:

  • One time lump  

  • Fixed amount monthly payments for a specific time frame

  • Fixed amount monthly payments until you no longer live in the home

  • As a line of credit

  • A combination of the above

Your reverse mortgage advisor can help you choose an option that will best satisfy your needs and objectives.

 

How am I allowed to use the funds?

There are no restrictions on how you use the funds from the Reverse Mortgage. Many people use them to supplement their retirement income and to cover daily living expenses. This is the reason the Reverse Mortgage option was created in fact, to support seniors during their retirement. Some people use the funds to repair their home or to modify it for ADA reasons. Others use it to take a family vacation, pay off debt or cover unexpected bills. How you choose to use it is up to you.

 

If you have additional questions about Reverse Mortgages, give us a call. We are happy to answer your questions about reverse mortgages to see if it is in line with your retirement goals and objectives.

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We help Colorado clients finance their dream and

get the best rate, program, fees, & payment they qualify for!

 

Kevin Guttman

Certified Reverse Mortgage Planner

Home Finance Advisor

Financing Your Dream

Colorado Springs, CO 80920

877.251.9709

kevin.guttman@gmail.com 

www.ReverseMortgageAdvisorsUSA.com

www.ColoradoHomeLoanTeam.com

www.HomeAndLoanExperts.com

 
 
 

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