Reverse Mortgage Pros and Cons
PROS: THE ADVANTAGES OF A REVERSE MORTGAGE
• Tax free income insured by the Federal Government which continues as long as your home is your primary residence. Freedom from stress and worry.
• Change your plan at any time from a line of credit, cash out, monthly checks, or a combination (depending on what remains.) The remaining Line of credit grows each month at half percent over the current interest rate.
• The HECM Line of Credit (LOC) option has many advantages for the borrower. First, the line of credit grows over time at the SAME EXACT rate as the interest rate on the loan. If you allow the line of credit to remin untouched for five or ten years, the line will be substantially larger at the end of that period at which time you can tap into some or all of the line of credit. The line of credit cannot be cancelled by the lender. You also do not have to qualify with a particular credit rating in order to get a HECM or to qualify for the line of credit. While there is a financial assessment in order to ascertain if you can pay your taxes and homeowner's insurance, there is no requirement to have a particular credit score.
• A great option for seniors wanting to remain in familiar surroundings and in the same community where they've lived for years.
• Moving from one's home can cause emotional turmoil and stress for many senior homeowners. Memories were made in your "home sweet home", and proximity to loved ones may seem a much better option.
• Reverse Mortgages can satisfy existing mortgages or other debt which is a plus. (Note: These debts will be transferred to your Reverse Mortgage and interest will accrue.)
• You can remain in your home as long as you wish no matter what is owed the lender. You can never be forced out of your home as long as your real estate taxes and homeowner's insurance are paid and as long as you maintain your home. And if your spouse was underage, after your passing your spouse will still be able to live in the home.
• You can refinance your Reverse Mortgage again and again as long as there is equity in your home
• If you sell the property, you can never owe more than your home is worth. Upon your passing, however, should your heirs decide to keep the home, the lender will require repayment of the full mortgage debt.
• None of your assets can be attached to repay the Reverse Mortgage debt. Additionally, the debt does not pass to your heirs or your estate. The house stands for the debt. (This is called a non-recourse loan with no deficiency judgment.)
• Reverse Mortgages have safeguards: capped interest rates, a limitation on fees, HUD counseling, asset protection (non-recourse loan), no maturity date (cannot become due during a borrower's lifetime (goes to age 150.
• Your heirs may be able to claim the interest from your Reverse Mortgage on their income taxes.
• Use proceeds for long term care or other expenses such as repairs on your home or even a vacation or new car purchase.
CONS: THINGS TO THINK ABOUT BEFORE GETTING A REVERSE MORTGAGE
* A Reverse Mortgage has all the typical closing costs one finds with a typical FHA mortgage, but fees are higher than with a traditional mortgage. There is an up front Mortgage Insurance fee (MIP) of 2% based on appraised value which is mandated by the FHA and which cannot be eliminated. However, this is not an out of pocket expense. HECM counseling fees are minimal, and if your financial situation warrants, this cost can be included on the HUD-1 (closing statement) at closing and not an out of pocket expense. The appraisal fee is anywhere from $450 to $800 depending on the type of home.
As for other closing costs, title fees, recording fees, origination fees , these are costs that all mortgages have and are not out of pocket expenses.
• A Reverse Mortgage can reduce your children's and grandchildren's inheritance. A Reverse Mortgage is a rising debt loan since no mortgage payments are being made and is the opposite of a typical mortgage where equity increases as mortgage payments are made. You can make mortgage payments on a Reverse Mortgage is you desire.
• Selling your home can provide a greater return than a Reverse Mortgage.
• Moving from your residence in less than five years makes a Reverse Mortgage impractical. It does not make good sense to use a Reverse Mortgage short term due to closing costs.
• If you fail to pay your real estate taxes or homeowner's insurance or neglect to maintain your home in decent condition, the lender may require repayment. (Reverse Mortgage lenders, however, will work with you to cure the default.) • If you leave your primary residence for a period exceeding 12 consecutive months, the Reverse Mortgage will become due. (Nursing homes, assisted living, moving, passing away, etc.)
• If your heirs wish to benefit from your home after your passing, they can sell the property and keep the remaining equity or they can get their own mortgage. However, in keeping the home, the full balance will be due. • Medicaid may be affected, and you may not qualify for benefits unless you spend down your Reverse Mortgage proceeds each and every month. (Check with your attorney and Medicaid to discuss Medicaid's eligibility requirements.)
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Using Equity to Make Life Easier
It's Your Equity - Take Advantage of It
Your home's equity is waiting for you to use it for your benefit. Why not let your home pay for your retirement? I have spoken with many senior homeowners who just didn't have enough money for retirement and were thrilled to use their equity for a variety of things. Using a reverse mortgage as a retirement planning tool can change the way you look at retiring. You don't do a reverse mortgage out of desperation, you do it because you realize there is untapped cash under your roof that you can use to enjoy life even more.
Safeguards to Protect You
Reverse Mortgages offer the following safeguards: No pre-payment penalty, reverse mortgage counseling, government insured and regulated by HUD, FHA mortgage insurance to protect you, 60% cap on proceeds for the first year, non-recourse loan-- you can never owe more than the home is worth, protection for non-borrowing spouses/underage spouses, 3 Day Right of Rescission just in case you change your mind after closing.
Non Recourse Loan
With a Reverse Mortgage, you can never owe more than your home is worth and probably will not pay the loan off in your lifetime. This is due to a feature written into the reverse mortgage called "non-recourse." Your heirs are also not responsible for the debt as well. Assets or bank accounts can never be attached to pay off the loan no matter how much money you have. "A nonrecourse debt is a type of loan secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount." (Investopedia)
REMEMBER: The house alone stands for the debt. A reverse mortgage is a loan in which a lender may look only to the property for repayment even IF the loan balance goes beyond the value of the home. If you sell the home to repay the loan or if all borrowers pass away, you or your heirs will never owe more than the balance of the reverse mortgage or the value of the property, whichever is less.
A Program That Changes Lives
Borrowers have been able to pay off current mortgage, travel, buy another home, or do a host of things with the money they receive. You can supplement your income and find the time freedom you desire. Many homeowners have been helped out of bankruptcy and even foreclosure. Others have postponed collecting social security till a later date thereby getting the most out of their monthly check.
When NOT to Get a Reverse Mortgage
* An equity loan (if you qualify) may be a cheaper way of getting cash out of your home as closing costs may be lower. But you will still have to qualify with your income and credit.
* If your primary goal is fixing up your home and a community loan is available and will provide adequate funds, this may be a better option.
* If you are ill and assisted living or a nursing home is imminent, do not choose a Reverse Mortgage.
* If your financial situation will preclude you from paying real estate taxes, insurance, and maintaining your home, forego a Reverse Mortgage.
* If your children offer their home, and you can spend your remaining years with family, this may be a better alternative than staying in your home.
I hope this helps in answering questions as to when to do a Reverse Mortgage and when not to do a Reverse Mortgage.
Please call me with your questions. 631-804-9044
Reverse Mortgage Closing Costs
FHA Closing Costs
All closing costs can be financed into the loan except the appraisal fee and counseling fee. HECM Counseling, which is required by HUD, is a fee that can be waived based on your income status. Here are typical reverse mortgage fees:
FHA MORTGAGE INSURANCE
This fee at closing (which is almost always financed in the loan) is 2% of the appraised value of the home and .5% of the ongoing/outstanding balance. You will get a statement each month showing the loan as it accrues. This statement also shows your line of credit growth.
THE ORIGINATION FEE
This fee is the lender’s fee. The maximum fee is set by FHA and is 2% of the first $200,000 of your property value and 1% over $200,000. The maximum origination fee is $6,000.
TITLE FEES & OTHER FEES
* Lender's Title insurance
* Settlement or closing fee
* Endorsements
* Recording fees
* Courier fee / Overnight
* Document preparation
* Notary Fee
* Flood certification
* MERS registration
* Credit report
* Searches/Patriots
*Tax Cert Fee
APPRAISAL FEE
A home appraisal (interior and exterior) will determine the value of the property. An FHA appraisal has different parameters than a conventional appraisal. It is required to be done by an FHA-approved appraiser, and the appraisal must meet FHA guidelines. (Cost $430 to $800 depending on home value and type of home.
HECM COUNSELING FEE
It is required that all Reverse Mortgage borrowers obtain HECM counseling from a HUD approved counselor. Once counseling is complete, the counselor will issue a HECM counseling certificate. The Reverse Mortgage loan cannot proceed without this certificate. The counseling fee is $150-$175 and can be done in person or over the phone.
The benefits of having a Reverse Mortgage are truly incredible! Where can you get cash out of your home, open up a line of credit that GROWS at exactly the same rate as the interest on the loan, and yet make no monthly mortgage payments?
The HECM Line of Credit
Having an Advantage That Works
The Line of Credit That Doesn't End
Not having to pay any monthly mortgage payments on the HECM is a great advantage. But what's even better is the LOC, Line of Credit. You can draw on your credit line whenever you need to whether to enjoy life more or pay some bills.
The HECM line of credit stays open so the funds are there when you need them. The HECM line of credit grows over time as the unused portion of the line of credit grows at current expected interest rates. So, for example, if you took out the HECM line at age 62 or 65 and left it there for say 10 or 15 years, just think how much would be in your line of credit at the expected rates of interest.
HECM: Both the reverse mortgage and HELOC will only accrue interest on the money drawn or borrowed. Only the reverse mortgage’s line of credit will allow the unused portion to grow at the same rate the borrower is paying on the used portion of the line. This will give the borrower greater borrowing power. ... advantage -- the credit line growth rate and the fact that the line cannot be closed like a HELOC at the banks discretion.
