Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.
If you need gmoney to live comfortably after your retirement or approaching retirement, a reverse mortgage may be just right for you. How does a reverse mortgage work, and to find a reverse mortgage calculator? This instrument can be the solution to many debt problems and financial issues. However, before you borrow against the equity that you’ve built in your home, there are many requirements you need to know before signing on the dotted line. Borrowers may want a more comfortable retirement. There are many reverse mortgage pros and cons.
They may need the cash to buy a second home, a pied-a-terre, or make home improvements. While a reverse mortgage has many benefits, you will need to decide if it’s the best option for you. You must understand what a reverse mortgage is and understand if it’s right for you. We’ll cover everything so you can make an informed decision.
A reverse mortgage allows seniors 62 and older to borrow against their equity in their primary residence. It is a home equity loan that will enable you to maintain ownership while converting your home’s equity into cash. In many states, particularly in New York City, a reverse mortgage loan takes a portion of your equity to make it possible to obtain the money that’s tax-free and thereby nullifies any monthly mortgage payments on your primary home.
There are risks involved in a reverse mortgage, but borrowing equity from your own home gives you funds. This is if you have money in your home but not enough in your bank. Other reasons are that you don’t have enough money to cover retirement expenses, or you need a way to supplement your income.
You may be on a fixed income, which barely covers ordinary expenses and monthly obligations like home insurance. Or the money allows you and your spouse to live comfortably during retirement.
If seniors have insufficient funds, a reverse mortgage may be the best way to get money to avoid having to turn to high-interest lines of credit or other more costly loans. But, depending on the type of loan you get, the money is yours, and you can use it for any reason. You can use it to renovate your home, be able to afford proper health care, give portions to your children or heirs or pay off debt, for example.
A reverse mortgage is a great way for retirees to benefit from their home mortgage loans that they have been paying throughout their life. Finally, they can capitalize on their home’s value. All that hard work saves, and paying a loan will be realized if approved for a reverse mortgage loan. A reverse mortgage works by allowing seniors who are 62 and older to borrow from their home’s equity without making monthly payments on the loan.
You also don’t have to make monthly principal and interest payments on the reverse mortgage. This frees you from having to pay monthly mortgage expenses. So a reverse mortgage is the opposite of a traditional or home mortgage loan. With a conventional mortgage, you make payments each month to a lender. With a reverse mortgage, the lender makes payments to you.
As long as you continue to live in your primary residence, you don’t have to pay the portion of the equity that you borrow. While you have the reverse mortgage loan, keep in mind that you also don’t have to sell your home to your bank or move from the home. As indicated above, you don’t have to make monthly payments on the loan. Since a reverse mortgage is essentially a loan, you retain ownership of your home. And your loan lender won’t touch your title or somehow alter your ownership rights to sell your apartment.
If you want to repay the loan, you won’t be hit with a penalty, although many seniors don’t do this because they need all the money they can get. A reverse mortgage guarantees a line of credit as well as a steady and reliable monthly income.
You’re not required to make monthly payments until the reverse mortgage loan reaches maturity. And you can defer payment until you pass away, sell your home, or if you are the final home borrower and you move out of your home permanently, such as going to a nursing home. The loan also comes due if the borrower fails to pay maintenance charges, insurance, and taxes or if the borrower fails to maintain the home’s integrity.
Seniors over 62 may not be able to borrow their entire equity even if their home mortgage gets paid off. That’s because the amount of money you can borrow, known as the principal limit, varies based on the youngest borrower’s age, current interest rates, and your home’s appraised value. The principal limit will be higher if seniors are older and their property is worth a lot. Also, the funds may increase if the homeowner has a variable-rate HECM.
HECM stands for Home Equity Conversion Mortgage (HECM). As we’ll discuss in full later, Federal Housing Administration (FHA) offers the HECM. It is the most popular type of reverse mortgage loan.
If a HECM has a fixed interest rate, you will receive a lump-sum payment. With a variable-rate HECM, you have more options. You can be paid equal monthly payments for a fixed period of months. You can draw a line of credit until it runs out, a combination of the two, and more.
To qualify for a reverse mortgage, there are many requirements you must meet.
It’s preferable to the lender that you own your house outright or have a low balance on your home mortgage or have at least 50% equity in your home. That way, your interest rates will be lower and on favorable terms. But even if you don’t reach those scenarios, you can still qualify for a reverse mortgage.
When you take out a reverse mortgage loan, you must follow the overriding guide to pay off your existing home mortgage. If you are not even close to paying it off, don’t worry. You can use the money from your reverse mortgage to pay off your lender.
That’s why it can be vital that you are almost near paying down your home loan. If you aren’t, the money you receive after subtracting the fee for paying off your home mortgage will be lower than you may be counting on.
If there’s a balance on an existing home equity loan or any tax liens or judgments, these also must be paid by the reverse mortgage, making your allocated funds even lower.
You’ll get even lower if the following is true. If you have a lot of debt with high collection fees, you need to pay these off too. If you can’t afford to pay the debt, you can get a cash advance from the reverse mortgage to close your high-debt accounts. An example is credit card debt or ambulance and hospital fees that your insurance doesn’t cover. Lastly, you need to account for home improvements on your house that you must pay to qualify for a reverse mortgage. This will be another hit on you, lowering the number of funds you’ll receive.
After you take care of your finances, only then will the reverse mortgage lender pay you the remaining balance. A senior will typically receive around 50% of his home’s appraised value. If you are lucky enough to own your home entirely, you’ll receive all of the funds from the reverse mortgage loan since you don’t have a mortgage balance to pay off first.
These include keeping current on your property taxes, your homeowner’s insurance fees, and any homeowners association fees. Since the interest on a reverse mortgage accumulates every month, you’ll still need to have enough income to pay for these dues.
The home you reside in must be your primary residence, which you qualify if you live there for more than half the year. While residing at your primary residence to get the loan seems obvious, this housing must be the place you borrow equity from.
Your primary residence must be maintained and be in good working order to meet the Federal Housing Administration’s strict standards (FHA). In New York, if your plumbing is awry, you must pay for that. If the neighbor above you has a leak that created water stains on your ceiling, you must make sure the leak is fixed and that the ceiling is painted over.
A HUD-approved reverse mortgage counselor must interview borrowers. Many think they can get away from counseling. Still, the interview is essential because this is when the counseling agent decides on your ability to pay by factoring in your income and debt obligations. If you don’t seek and complete counseling, you will not receive a certificate of completion signed and delivered to the lender you plan on using. More onerous is that your lender will not disburse the funds if you don’t undergo counseling.
There are three different types of reverse mortgages, and each one fits another financial need.
A HECM is only offered by and only insured by the Federal Housing Administration (FHA)-approved lenders. This is the most popular and widely used type of reverse mortgage that borrowers often choose. With HECM, borrowers receive funds from their lenders tax-free, and heirs of the borrowers inherit any remaining equity after the borrower pays the reverse mortgage in full.
A PRM is a private loan not backed by the government but instead backed by private lenders. There are no restrictions on how you can use the equity. Unlike HECMs, PRMs provide larger loan amounts, especially if you have a high-value home. But like HECMs, proprietary reverse mortgages only allow seniors to borrow a fraction of their home equity, which is often 50%.
This loan is used less often than the other two and is offered by nonprofit organizations and state and local government agencies. The reason is that the borrower can only use the funds to cover one specific purpose. An example is replacing steps in a home for accessibility ramps or wheelchair ramps.
There are several fees involved when getting a reverse mortgage. The closing costs are the most expensive, but if you have a HECM mortgage, you can roll the costs into the equity loan. This saves you from shelling out the money upfront. The following are the other fees you should come to expect.
Your loan lender charges an initial and annual mortgage insurance premium. This is not homeowners insurance but an additional premium. The MIP guarantees that you will receive your loan advances in the way you decided on how the funds will be disbursed. There is 2% of the home’s appraised value at closing and an annual MIP that accrues annually when the loan comes due. This charge is 0.5% of the outstanding loan balance. The borrower can finance the MIP into the loan.
When you close on a loan, the borrower pays the upfront MIP to the FHA. It turns the loan into a non-recourse loan to protect you and the lender. A non-recourse loan means that both you and your heirs are not personally liable for any portion of the mortgage that exceeds the value of your home.
This happens when the loan reaches its maturity or when the borrower repays the loan. So if you sell your house for less than what is due on loan, the MIP swoops in and pays for the difference so that you don’t default and the lender doesn’t lose money. The reason behind this is that this is a significant investment for the lender.
The mortgage origination fee is the amount of money a lender charges you to originate and process the loan. The lender will charge the greater of $2,500 or 2% of the first $200,000 of your home’s value, plus 1% if the home’s value exceeds or is over $200,000. The FHA sets the cost of the origination fee. The origination fee can’t exceed $6,000 and is paid directly to the lender. The law establishes a cap to keep closing costs reasonable for borrowers.
To maintain and monitor your loan for its duration, a lender will charge you a monthly servicing fee. The fee can’t exceed $30 for a loan with a fixed rate or an annually adjustable interest rate, or $35 if the rate varies every month.
To determine the borrower’s home’s value, you need to hire and pay for an appraisal. The cost depends on the home’s size and location. The appraisal fee can cost only around $300, but most times, the fee skyrockets, and you may have to pay as high as $500 or more. Be prepared to allocate funds just for the appraisal.
You should be familiar with all the below fees you need to pay upon closing if you’ve ever purchased a home using a home mortgage loan.
This is one of the most expensive fees of all the fees you need to pay upfront. The cost can start (but never does) at $150 and go as high as $800 or more.
A stipulation that New York homeowners don’t need to consider is that they can’t live in a mobile home or a manufactured home. The only housing type in New York City that allows for a reverse mortgage is a condo, but it must be on the HUD/FHA approved condo list. If it’s not, you may still be eligible for a proprietary reverse mortgage.
HUD is the Department of Housing and Urban Development that works with housing agencies to manage low-income homes. A reverse mortgage is not an option for those who live in co-ops. Banks don’t allow reverse mortgages because, unlike a condo, a real, tangible property, a co-op is not. In a co-op, you buy shares in a corporation. This is one of the reasons why reverse mortgages are not popular in New York City.
Not usually. Sure, a lender will check a borrower’s ability to repay their current and future financial obligations. But it’s a little laxer than qualifying for a home mortgage loan. For example, there are no income requirements, so those on fixed incomes won’t have to worry about getting rejected. What counts are the stipulations. As we covered, these include living in the home for most of a year, having enough equity in your home to qualify for a loan, and over 62. If you meet these stipulations and more, you will most likely borrow equity from your home to get the loan.
But if you have been late in paying your mortgage or paying off the high debt within the past 24 months, there’s a big chance that you may not qualify.
Do you want your family to keep your home if you die? Or do your heirs wish to keep the house? If so, your family must pay off the loan balance with their own money. If they lack the funds, they can take out a home mortgage or refinance their own homes. But only if they qualify. If they can’t cover what is due, they may not keep the house in the family. If they think the home’s accrued interest is too high, they may walk away from the property. In that situation, the reverse mortgage lender will have no choice but to foreclose on the home.
There is a solution if close family members or other heirs sell the house to pay off the reverse mortgage loan. If they fail to do any of the above, then a reverse mortgage is only a good idea if you don’t plan on passing down your home to your heirs.
Yes. If you are married, it should be taken care of, as both you and your spouse are listed as co-borrowers on the reverse mortgage loan. If you don’t pass but have to move out of the house to go to a nursing home, your spouse can remain in the place and even continue to receive funds derived from your equity. Even if your spouse is not a co-borrower, the spouse can live in the home if you pass due to a law stipulated by HUD. This is called the Eligible Non-Borrowing Spouse.
You should look at a lot of reverse mortgage lenders to get the best deal. That means you should look for a lender with the lowest interest rates and upfront and recurring fees. Call around to find the cheapest lenders, but get answers to your most basic questions while doing so. Some questions are as follows:
Note that some lenders may look good on paper because of their low-interest rates. But they may be charging more upfront or make you pay unnecessary fees. So do your homework if you don’t want to get gypped.
Reverse mortgage loans are made for those above 62 who have decided to remain in their homes over the rest of their lifetime. Since these are for a reasonable duration, and you need to borrow from your equity to remain stable or live comfortably, then taking out a reverse mortgage loan may be wise. But if you plan to move soon or after a few years because of medical issues, such as receiving care at a nursing home, then a reverse mortgage is not recommended.
There are many disadvantages of a reverse mortgage. The most important ones are as follows:
As a conclusion: Research reverse mortgages and become as well informed as possible. The more you know, the more confident you will be in your decision. There are risks. The more information you have, the easiest you can determine if the benefits outweigh the risks. Depending on your situation, there may be better options for you. A financial planner or a loan officer may be able to discuss various options with you. An example is to sell a home and purchase a smaller property.