Find the best realtor and take advantage of reverse mortgages today! It’s a unique but helpful form of home loan for seniors, in which they can tap on their home equity to gain cash. Then, they can get the lump sum from the lender. Or choose to enjoy a regular flow of income.
Sounds like a great deal? Not quite. Lenders don’t just give out their cash as reverse mortgages. Homeowners need to qualify for it, and they need to pay it back.
And many homeowners fail to understand how reverse mortgages work. As a result, they stumble on big pitfalls after a few years of enjoying their equity funds. You wouldn’t want that. That’s why you must better understand reverse mortgages before applying for one.
Read on, or talk with the best real estate agent near you.
Understanding the Basics of Reverse Mortgage Loans
In essence, a reverse mortgage is getting cash from a lender instead of paying them each month. For example, let’s say you get approval for a reverse mortgage. You can choose to get a lump sum of cash from the lender or have them give you an amount each month.
You do not need to pay regularly; you only have to pay it back when you permanently leave the property, sell it, or upon death.
But why would lenders give you money in a way that seems unfavorable to them? Because they have your house property and its equity as a guarantee.
Quick Overview about Home Equity
Home equity is a vital factor when talking about reverse mortgage loans. And the best realtor can help you determine the equity of your home. But what is home equity? It is the difference between the current value of your property and the remaining mortgage that you still need to pay.
For example, you have bought a house that costs $250,000. You have paid $30,000 for the down payment, and the remainder $220,000 through a mortgage. This means your home equity is the $30,000 you paid, because it is the difference between the total property price and the mortgage amount.
But the more you pay off, the more your equity increases. If you pay $50,000 off your mortgage over the next couple years and only have $170,000 worth of mortgage left, $80,000 is your new home equity.
Another scenario that can pull up your home equity is the increase in property value. If a property that costs $250,000 a couple of years ago increases to $300,000 today and you only have $170,000 left of your original mortgage to pay, your home equity is now $130,000.
How to Qualify for a Reverse Mortgage
There are a few essential considerations when applying for a reverse mortgage loan.
- First, you must be 62 years old or above.
- Second, you should have no unpaid mortgage. Yes, you may have a remaining balance, but it must be easily payable.
- Third, you must be living at the property where you’re applying for a reverse mortgage. You must be capable of paying property taxes and home insurance too.
Also, remember the amount you get depends on the equity of your property. That’s why you must know the current value of your home and your remaining mortgage balance before applying for a reverse mortgage.
You can use “comps” or comparable houses to estimate the current value of your home. Look for properties for sale near you that have similar features to your home. Think of land area, floor area, number of bedrooms and property size. Then, get the average value of their price. Of course, a real estate expert can help you with this best.
Another good solution is to hire a property appraiser. They can give you a rough estimate of your current home value. In fact, most reverse mortgage lenders require appraisal results when you apply.
Lastly, be sure to prepare for the expenses when applying for a reverse mortgage. Aside from the cost of a property appraisal, you should also prepare origination fees, initial insurance premium, and closing cost. You can also pay for additional options that might pull down interest rates.
Three Main Classifications of Reverse Mortgages
Perfect for clients with middle-range income or lower. Single-purpose reverse mortgages are usually available only for property taxes and home repairs or improvements. You can get this mortgage from selected state or local government agencies and some non-profit groups. Ask top real estate agents about where to find such packages near you.
This type of reverse mortgage doesn’t demand any income or medical requirements. You can use it for any purpose too. It is available almost everywhere because it is supported by the US Department of Housing and Urban Development. But this is the most expensive choice among other reverse mortgages.
This type of reverse mortgage is offered by private companies or entities. It is supported with their private funds too. So, you need to select a reliable lender when going for this option.
Methods of Receiving Your Cash
Now, you need to choose the best method for receiving your cash. Select one that is applicable for you.
- Get the total mortgage amount at once
- Get the total mortgage amount for purchasing a new house property
- Spread out the lump sum into monthly payments over an agreed period
- Get a credit line for you to use anytime
- Combination of credit and cash payments
How Would You Pay a Reverse Mortgage?
Many seniors worry about this factor when planning to get reverse mortgages.
The best realtor would help explain this to you. However, it is all about the agreement when you apply for such loans. You should pay it when you leave the home permanently, when you sell the property, or upon death.
It’s great if the homeowner can pay the loan when they leave or sell the home, otherwise their family may have to pay the loan when the homeowner dies. But the lender maintains the rights to take the home when they receive no payments.
To help you make a final decision, gauge the pros and cons of reverse mortgages with a top ranked realtor guiding you.
Advantages of Reverse Mortgages
Receive Extra Cash
You want to apply for a loan because you need extra cash. That is what reverse mortgages do. It lets you tap on your home equity and get a full amount or monthly cash. And you can use it for certain purposes.
You can even use it to buy a new smaller home. This is perfect if you need a place that is easier to maintain. But consult with the best realtor before making that choice.
No Conflicts with Your Social Security and Medicare
Reverse mortgages are loans that don’t cause any problem to your social security and medicare benefits. You do not need to worry about receiving lesser assistance from those programs.
You do not need to think of paying huge taxes too. Reverse mortgages are often tax-free loans for seniors. Meaning, you can enjoy the cash without any deductions. However, you must look for a reverse mortgage that offers this benefit.
Lenders Can’t Force Your Family to Pay
The law says that reverse mortgage lenders cannot chase the families of a homeowner after dying. This includes widows and widowers, too. But remember that lenders can still take the home when they get no payments.
Disadvantages of Reverse Mortgages
Your Family can’t Easily Take the Home when You Pass Away
As mentioned, the lenders can take the home if you or your family can’t pay. So, when you pass away, your family cannot keep the home without paying the reverse mortgage. This means it can be a bad choice to pass the property down to your heirs if your family is not in agreement or cannot make the payments.
You May Live Longer than Your Home Equity
This is common among reverse mortgage borrowers. You will likely outlive your home equity payments and you will have to start paying them back. It is best to already have a plan in place to repay the reverse mortgage before you are approved.
Most Reverse Mortgages are Adjustable Loans
Adjustable loans refer to interest rates that rapidly fluctuate up and down. This often leads reverse mortgage borrowers to have huge interest rates to pay. That’s why you must talk with the best realtor about this and tell them to help you find a reverse mortgage with fixed interest.
Reverse Mortgages are Expensive
It is costly to apply for reverse mortgages. It has higher origination and closing fees, among other charges. You may even find yourself spending up to 2% of the value of your property.
Is Reverse Mortgage Loan Suitable for You?
A reverse mortgage is a helpful financial product for seniors today. But it can be damaging depending on the situation if not carefully considered. That is why you must take time in making a choice. Ask as many people as you can. Consult with a financial adviser for some input, too. Then look for the right package that fits you.
For more info about Mortgages Click here