reverse mortgage Archives

We all know what a reverse mortgage is. Well, perhaps the basics. It is a mortgage loan program specifically designed for senior homeowners.

One very common reverse mortgage program is the Home Equity Conversion Mortgage or the HECM. It is offered by the Federal Housing Administration. Just like any FHA loan, the HECM is government-guaranteed.

What does that mean? It means that a lending company or a bank provides the funds that will be loaned to the borrower. To lessen the risk, the FHA insures the lender. In case a borrower fails to pay the loan off, the FHA pays the lender the whole or a part of it.

Qualified senior homeowners may convert a portion or their entire home equity into money which can be used readily. These funds can be spent in whichever way the borrower chooses.

The most common would be to cover for medical expenses or to pay for the family’s monthly expenditures. Some also choose to use the money to buy a second property or to put as an investment.

Unlike other loans, the reverse mortgage loan does not become due the moment the borrower receives the money. In fact, it is the lender who will make the payments to the borrower. This payment can either be a lump sum or on a monthly basis, whichever way the borrower chooses.

So the question is, when does the loan become due? It will only be payable the moment the property is sold, the borrower chooses to move out of the house or the borrower dies.

Sounds like a really good program. Well, it truly is a loan that many can take advantage of. There are many pros to a reverse mortgage loan. If you want to learn more about the benefits of a reverse mortgage, click here.

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While there are good things about this program, it is not free of drawbacks. If not careful about the choices you make, a good program can backlash and cause you trouble.

For you to have a clearer picture, we have enumerated some of the disadvantages a reverse mortgage has. By knowing both its pros and cons, you will be able to figure out if this truly is a perfect choice for you.

1. Your mortgage may become due earlier than expected if you are not paying your property insurance, taxes and/or association fee diligently.

Yes, this scenario can happen. Many seniors misunderstand a reverse mortgage. They believe that it is the easy way to deal with any money problems. Most of them forget that it is still debt, and debts need to be repaid.

When you miss a few payments, it does not automatically mean you will be losing your home right away or you will begin paying the loan off. In most cases, lenders will try to help the homeowners in dealing with the missed payments.

However, if despite the intervention the issue still persists, lenders may step in. It can result to the mortgage becoming due prematurely.

For HECMs, there are ways to prevent this from happening. First, the borrower has to complete an HECM counseling course where all the details of a reverse mortgage are discussed. This includes the need to keep current on property insurance, taxes and/or homeowners association fees. Another preventive measure is if, after thorough evaluation, your lender sees that there is a risk that you may have trouble paying them, a part of the funds from the loan will be set aside for this purpose.

2. You are taking a mortgage during your retirement.

A reverse mortgage is a mortgage. Some people strive to be free and clear of a mortgage before they retire. Others reach the age of retirement but are still paying it off. The moment they become mortgage-free, it is a huge relief on their part.

While a reverse mortgage is different from other loans for the reason that the borrower does not make monthly payments, that does not mean that the debt won’t have to be paid back.

It is a loan after all, not a grant.

There will come a time that you have to start paying the money you have borrowed, with interest. So, before you spend the money on things that don’t grow your reserves, think about how you will be able to afford to pay the loan off when the time comes.

Would it be wiser to invest your money so it grows and you would not have to worry much when payback time comes?

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3. If you die, your children or your living spouse will have to start paying for the debt.

We have laid this one out clearly earlier. In an unfortunate event of the death of the borrower, the loan will become due. If you’re dead, who pays? Straight answer, your family pays the debts.

This won’t be a disadvantage if you have left them enough reserves to pay for it, or if they have enough income to pay for it themselves. But if they don’t have the capacity to make payments, they are at risk of losing the house.

There can be two scenarios, they can sell the property to repay the loan or the lender may take the home instead because the loan cannot be repaid. Whichever of the two happens, they end up in the same situation– they won’t be able to keep the house.

This brings us to another disadvantage.

4. You won’t be able to have a home to leave to your posterity.

If you do not have plans of having the property inherited by your children, you won’t see this as a problem. But if you have, a reverse mortgage can put an end to your plans.

The loan does not become due unless you move out or sell the property. But debt needs to be paid, it is only a matter of when. You can choose to start paying it even before it is due. But that still depends on the agreement you have on your reverse mortgage contract.

If you die, your children will be liable to pay the loan. There is a big change that in order to repay it, they will have to sell the home.

While these scenarios mentioned above sound so pessimistic, these are still possibilities. This is why you really have to ponder on taking a reverse mortgage. Do you need it? Does the loan work at your benefit? Does it put you on great risk for loss?

However, there are many ways a reverse mortgage can be useful to the senior, no doubt about that. Study your situation. Strategize your plan of action. Most of all, you must not hesitate on seeking for an expert’s help.

A lender knows how things work. Their input can be of great help when you are planning to avail of a reverse mortgage.

Do not forget to shop for lenders, so you can compare the terms and interest rates. By doing so, you will find a loan they best fit your unique needs.

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What is a Reverse Mortgage: Top 10 Facts

Reverse mortgages are not your typical mortgages. First, there’s an age eligibility. Borrowers must be at least 62 years to qualify, although certain protections are afforded to spouses who are younger than 62. Age is an important factor in determining how much a borrower can get.

Second, they must own the home outright or paid down substantially their mortgages. This ensures that indeed the home has adequate equity to draw money upon.

Third and more importantly, reverse mortgages disburse funds to the borrowers in the form of a lump sum, a line of credit, or a periodic payment. These payments will continue until such time as the loan matures: when the borrower/s pass away, move out, or sell the home. This definitely runs reverse to how mortgages work traditionally.

Fourth, when it becomes due and payable, the loan must be paid off. The most usual route to paying off the loan is by selling the property based on its market value.

Fifth, the interest rate on a HECM reverse mortgage has an initial interest rate and an expected interest rate. The IIR is the note rate that accrues on an annual basis while the EIR exists to determine how much a borrower can qualify based on his/her home’s market value.

Sixth, the IIR won’t change in fixed-rate mortgages but will be variable in adjustable-rate mortgages. A borrower who opts for a fixed-rate mortgage will get a lump sum at closing while a borrower with a variable mortgage will get to choose among periodic disbursements, a line of credit, or a combination of both.

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Seventh, it’s important to emphasize that the borrower must be willing and able to pay property charges on the home. These cover the property taxes, the homeowners insurance, homeowners’ association fees, and so on. Failure to do so could lead to default.

Eighth, getting a HECM means paying the usual costs of getting a mortgage. Mortgage insurance premiums, origination fees, third party charges such as appraisal and title search, and servicing fees are part of a reverse mortgage’s cost.

Ninth, a reverse mortgage borrower must undergo counseling with a HUD-approved counselor to know if it is the right financial product.

Tenth, property types eligible for a HECM reverse mortgage are single-family homes, condo units in HUD-approved buildings, manufactured homes, and two-to-four unit homes in which the borrower occupies one unit. The borrower must continue to occupy the home as his/her primary residence.

How to Shop for a Reverse Mortgage

Being home equity loans, reverse mortgages have plenty of uses. For health care, debt consolidation, home improvement, and more. Older borrowers stand to benefit more because the higher the age, the bigger the amount one can borrow.

To ensure you get your equity and money’s worth, be sure you have checked all your possible options. If you settle for a reverse mortgage to help you in your retirement, make sure you get the right one.

Always shop for the best possible rates and don’t be afraid to ask questions. Be sure to talk with an HECM counselor about your future plans, especially on whether you can afford to pay the property charges.

Just like any financial product, it takes time to understand reverse mortgages. So take time to research, shop and decide.

The Drawbacks of a Reverse Mortgage