How To Use A Reverse Mortgage
Are Reverse Mortgages Good or Bad?
In the economical climate of today, more and more seniors are becoming enamored with the idea of reverse mortgages.
However, as in many situations today with economics, it pays to learn more about reverse mortgages before entering into one.
This is a fact that even the government understands all too well because in order for a senior to enter into a reverse mortgage, the homeowners have to go through counseling with HUD (Housing and Urban Development).
Let's examine the mechanics of reverse mortgages and some pros and cons and see how reverse mortgages shake out.
How Reverse Mortgages Work
A reverse mortgage takes the equity you have in your home and converts it into cash that can be paid to the homeowner in several ways.
You can receive a monthly amount of money, a lump sum or a combination of both.
Why Do Seniors Need Reverse Mortgages?
Seniors are turning to reverse mortgages because living on a fixed or reduced income makes it nearly impossible to come up with the cash needed for unexpected major home repairs, medical bills or other catastrophes.
Most seniors considering reverse mortgages want to remain in their own homes as long as they can and not be a burden to their family and friends.
Are There More Pros Than Cons to Reverse Mortgages or Vice Versa?
The feasibility of a reverse mortgage all depends on the individuals involved. Reverse mortgages are extremely popular right now in California, New York City, Denver, Phoenix, Boston and parts of Florida.
While reverse mortgages are on the rise, they still account for about 7/10ths of 1% of mortgages.
Let's look at the advantages and disadvantages.
PROS OF REVERSE MORTGAGES
- Reverse mortgages are easy to qualify for because they aren't based on credit scores or income.
- The homeowner does not make any monthly payments - ever.
- A reverse mortgage can be set up to be paid to the homeowner in a lump sum, a line of credit or as a monthly payment
- The homeowner will receive income monthly as long as he or she lives in the
house as their primary residence.
- This means that even if the loan balance is higher than the home is worth, they will still receive money every month.
- The only time a monthly payment is due from the homeowner is when he or she dies, moves or sells the house. Then the loan is due in full plus interest and fees.
- The homeowner nor heirs will ever owe more than the home is worth.
- This is no matter how many payments are received and in spite of how high the interest rates go.
CONS OF REVERSE MORTGAGES
- Homeowners must be 62 years of age or older to qualify for a reverse mortgage.
- Medicaid payments or any other federal or state program payments can be cut off in certain circumstances due to the homeowner receiving money, for instance a reverse mortgage payment made to the homeowner.
- It's important to see if any programs are subject to withdrawal by entering into a reverse mortgage.
- Closing costs are higher than any conventional mortgage. These fees can be double what they are with traditional mortgages and include origination fees, mortgage insurance and points.
- Homeowners continue to be responsible for paying property taxes, homeowner’s insurance and of course, have to cover all repairs out of pocket.
- If the homeowner becomes ill and has to go to a nursing home for instance, this changes the complexion of the loan and the reverse mortgage can become due.
Alternatives to Reverse Mortgages
Standard equity loans are a viable alternative to a reverse mortgage. It too is based upon the equity in the homeowner’s home but it is not attached to fees and closing costs.
An equity loan can land you with a nice chunk of change in the bank for emergencies or home repairs but the downside to a conventional equity loan of course is that the payment is due each month and increases your bills.
Another great alternative that many seniors do not know about is the National Council on Aging. They have information on many programs, grants and free services available to seniors such as replacing outdated furnaces, windows, and assistance through donation of needed repairs.
Contact your local government offices or the National Council on Aging if you are a senior and need help with home repairs.
Reverse mortgages seem to be a positive thing for many seniors. However, the most important thing to remember before entering into a reverse mortgage is to get your facts straight.
Appropriate sources of information are lenders who deal in reverse mortgages but you need someone who is unbiased and who does not have a vested interest in reverse mortgages.....and most specifically in YOUR reverse mortgage.
More Considerations on Reverse Mortgages
Some lenders are all in favor of reverse mortgages because they get their cash right away via the high closing costs.
Realtors on the other hand don't like reverse mortgages because they only make money when a home is sold.
Getting more than one opinion is essential and also participate in the HUD counseling which is mandatory.
Ask every possible question that you can think of such as "what happens if I get sick and have to go to a nursing home for 2 months?"
Factors that should not be figured into reverse mortgages but usually are is leaving something to the homeowner's heirs or feeling that the homeowner has “lost” equity or control of their home.
These are questions that the individual homeowner must decide but if a reverse mortgage is something a senior needs to do, then inheritance should be the least consideration.
There are many factors to consider when entering into a reverse mortgage but all you can do is weigh the options and decide what's best for you.
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