Tuesday, January 7, 2014

How Does a Reverse Mortgage Work?

If you’ve ever watched “The Price is Right,” than you probably have heard a thing or two about reverse mortgages, but not the sort of thing that actually answers your questions about it. Daytime television is the preferred media for the advertisement of these relatively new financial products, since they cater to the retired set rather than to younger folks. The ads that come up typically involve some trusted, much loved character from the baby boomer generation talking about how grand it is to have all that extra income every month to pay bills and cover medical expenses. While they do touch on some of the benefits of reverse mortgages, they often say little or nothing about what the product actually is, how it works, or how you might qualify should you be interested in obtaining one. Also known as a “Home Equity Conversion Mortgage,” it’s a good idea to know what you’re getting into before you make a decision.

Do You Qualify?

Qualifying for a reverse mortgage isn’t particularly difficult- there are just two primary criteria that must be met for you to get to the paperwork stage of the game. First off, you have to be at least 62 years old. This isn’t an equity loan for youngsters. The entire point of the HECM was to assist seniors with rising medical costs and to help them to avoid the kind of financial pitfalls that can lead to bankruptcy later in life. Secondly, you have to occupy the home as your primary residence. You won’t be able to do a reverse mortgage on your vacation condo in Boca. Sorry. While it really should go without saying, there’s also a little extra proviso that has to be met in order to qualify. You actually do have to have equity in the home in order to secure this financing. 

How much Can I Get?

The amount of payments on reverse mortgages varies according to the value of your home. For instance, if you have $100,000 in equity in the home, you can obtain a $100,000 Home Equity Conversion Mortgage. The amount you get is also determined by your actual age (older applicants will generally be able to get more,) the interest rate of the program that you choose, and whether you choose to take the payment as a lump sum, a line of credit, or a monthly payment. The amount you receive is then reduced by the typical fees you’d expect from a mortgage: Mortgage insurance premium, title insurance, appraisal, and any origination fees that the lender might assess. Of course, you could pay these up front, if you wish.

What Happens at the End of the Loan?

At the end of the loan term, which is when the borrower dies, sells the house, or doesn’t keep taxes and insurance up to date, as well as if you move out for more than 12 months, your heirs have some decision making to do. If they want, they can assume the mortgage under a traditional refinance, or the home may be given to the bank. At the end of the loan, the lender has a claim on your property, (the house,) but not you.They can’t, for instance, come after your checking account or those old coins you’ve got squirreled away in a safe deposit box.  

Any Final Tips?

If you decide that a Reverse Mortgage is the way to go for you, then there are a few things that you do have to keep in mind. First off, don’t squander the proceeds in Vegas. BAD IDEA! Seriously, though, it’s critical to keep the taxes and insurance up to date, and the interest you pay on the loan isn’t deductible until it’s actually paid off at the close of the loan. The proceeds don’t affect Social Security or Medicare unless those funds are kept in a liquid account such as a savings or checking account. In that case, they could potentially affect your eligibility. To be safe, make certain that you completely read through all the loan materials before you sign, so that you know exactly what you’re getting into.

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