A reverse mortgage is a loan. Unlike forward mortgages, which are used in buying a home, you don’t need to make any loan payments when it comes to the reverse mortgage. The loan becomes due if a borrower dies, sells their home, or moves permanently. The government requires lenders to structure a transaction, so the loan doesn’t exceed a property’s value.
This also helps avoid a situation where borrowers or their estate would be liable for paying the difference if the balance is higher than that of a home’s value. One of the scenarios that could cause this is a decline in the market value of the home. When it comes to the mortgages, you will be required to make payments to the homeowner and not lending institutions if there’s a reverse mortgage. Homeowners are allowed to choose how they would want to receive the payments and only pay interest on the proceeds. Having a reverse mortgage on a property that’s in an estate because the homeowner passed away can cause a lot of problems for everyone involved.
Interest is rolled into the loan balance, meaning homeowners don’t make any payments upfront. With time, a homeowner’s debt usually increases, and home equity usually reduces, if updates are not made regularly to the property. The mortgage proceeds are not taxable, making homeowners feel like they have more income. However, the IRS considers the money as a loan advance. People ask many questions during a housing counseling session such as “how do you know if this type of mortgage is right for you?” so we’re going to help answer that question now.
If You Don’t Plan To Move –
If you intend to take out the mortgage, you need to stay put in your home. If you are a starter, you will be required to pay high up-front costs. For example, borrowers pay origination fees, which can be as high as $6,000, depending on your property’s value. Usually, the upfront mortgage insurance can be either 0.5% or 2.5% of the home’s value. The terms will vary depending on the mortgage payment plan you choose.
Also, there are closing costs, including title insurance, home inspection fees, and a home appraisal to find out the market value. It doesn’t make financial sense to pay all the costs if you plan to move in a couple of years. Note that when you move, you need to repay the reverse mortgage, and depending on how you used the proceeds after taking it out, you may be unable to do that.
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If You Can Afford The Ongoing Costs –
Paying homeowner’s insurance, property tax, and maintenance costs is crucial if you borrow a reverse mortgage. If you default, lending institutions can declare your loan due and payable. If you fail to pay property taxes long enough, tax authorities can repossess your property and sell it to recoup the amount you owe.
Note that the tax authority’s claim to your home supersedes the lenders’. Therefore, when you fail to pay property taxes, the lenders’ collateral (your home) will be at risk. Additionally, if you don’t pay the premiums for homeowner’s insurance, the security will be at risk. This is because if your property is damaged, the insurance company will not pay for the repair costs.
Another ongoing cost is for home maintenance. Regular maintenance helps to improve the value of your property. For example, if you don’t replace a damaged roof, your property could end up with massive damages during the rainy season. Potential buyers will give low offers if a home looks neglected. A non-profit credit counseling agency can enlighten you about the expectations when taking on the reverse mortgage loan.
If You And Your Spouse Are 62 Or Older –
One of the qualification requirements when taking mortgages is being at least 62 years old. Therefore, if you are married and your partner has not attained 62 years, this type of mortgage will not work for you. Although the law offers protection for non-borrowing partners from losing their homes in the event of death, they will not get the mortgage proceeds. Both parties who own the property must be at least 62 years old or older.
If you set up the loan as a monthly income stream or a line of credit, your spouse may end up losing access to the income they need to cater to their essential needs. If you don’t need the money right now, postponing the mortgage will increase the proceeds.
Help Prepare Your Home For Your Needs –
There are no restrictions on how you can use the mortgage proceeds. One of the most common uses of the loans is making home improvements and necessary modifications to make sure the home is suited for aging.
Some of the expenses include installing wheelchair accessible lifts, wider door frames, and handrails. By doing so, you can stay in your home rather than moving into a new property. You can get housing counseling from a non-profit credit counseling agency to help you make an informed decision and answer any questions you may have.
Advantage CCS offers free Housing Counseling services, and we have highly-trained certified housing counselors that know all about Reverse Mortgages. They can help you decide if a Reverse Mortgage is right for you. Contact us today by calling toll-free 1-866-699-2227 or visiting us online at www.advantageccs.org.