What is a
Reverse Mortgage?
Reverse
mortgages convert home equity into cash. After years of paying off a conventional
mortgage, a reverse mortgage gives a homeowner the ability to borrow the home
equity that has been built up. A reverse mortgage loan is not repaid until the
owner moves, sells the house, or passes away.
Who
can get a Reverse Mortgage?
To qualify,
the borrower must be older than age 62 and own their home. The house must be paid
for or the remaining mortgage balance is small enough to be paid off with reverse
mortgage proceeds. The homeowner can own other properties, but the reverse mortgage
must be on the primary residence, and the homeowner must reside there at least
one month each year. However, unlike other loans, a reverse mortgage does not
look at your debt ratio or income sources since the homeowner does not repay the
loan as long as he or she occupies the home. Before applying for a reverse mortgage,
the homeowner must first meet with a HUD-approved, reverse mortgage counselor.
The counselor informs the homeowner of all available options and provides assistance
in determining the best option for the individual.
How
does a Reverse Mortgage work?
A
reverse mortgage pays out home equity in the form of cash to the homeowner. The
homeowner can receive the funds in a lump sum, fixed monthly payments, a line
of credit, or any combination of these options. The funds paid out to the homeowner
can be used for anything, including living expenses, medical expenses, home repairs,
education, travel, insurance and even preventing foreclosure.
The
reverse mortgage is not repaid until the homeowner moves, sells the house, or
passes away. If the owner dies, the bank gives the heirs approximately six months,
sometimes longer, to sell the home. Proceeds from the sale are used to repay the
loan. Any remaining proceeds go to the heirs. If other funds are available, the
reverse mortgage loan can be repaid without selling the house.
What
about Reverse Mortgage interest rates?
Reverse
mortgages offer only variable interest rates.
What
amount of money can be pulled out using a Reverse Mortgage?
The
older the homeowner and the more valuable the house, the larger the reverse mortgage
can be. Current interest rates and the home's location also factor in. If the
house is in need of substantial repairs or there is still a conventional mortgage
balance, the lender might require the homeowner to use funds from the reverse
mortgage to pay for these items first.
How
much does a Reverse Mortgage cost?
Reverse
mortgages have closing costs similar to other types of mortgages. This includes
an origination fee, appraisal fee, credit report fee, flood certification, escrow,
document preparation, recording fee, courier fee, and title insurance. Borrowers
are also charged a mortgage insurance premium (MIP) and service set-aside fees.
MIP protects both the lender and the borrower, if the amount owed to the lender
exceeds the value of the home when it comes time to repay the loan. MIP will pay
the difference. Service set-aside fees are deducted from the available loan limit
to cover the projected monthly loan servicing fees. The monthly service fee is
generally $30 to $35. The amount of the service set-aside fees depends on the
life expectancy of the homeowner.
Does
a Reverse Mortgage affect Social Security, Medicare, or other assets?
Funds
received from a reverse mortgage are tax-free and do not affect Social Security,
Medicare, or other assets. However, it may affect eligibility requirements for
government or state assisted programs.
The
Henssler Financial Group recommends evaluating all options before you choose a
reverse mortgage. Other options may include a home equity line of credit or refinancing.
