How Does a Reverse Mortgages Compare to a Normal FHA or Conventional Home Loan?
A mortgage is defined as an interest-based home financing facility that can be available to potential borrowers of real estate property. Mortgage or home loans allow potential buyers to acquire funds from a bank in exchange of a lien marked against the property they want to buy.
There are many different types of mortgage loans. The government has also introduced housing schemes to help people who cannot secure conventional mortgage facilities from private banks due to stringent credit requirements. Government based home loans can offer potential property buyers with lower interest rates, on relaxed terms like lower credit score and income levels.
There are individual mortgage loans offered for retired individuals as well. These loans are referred to as reverse mortgages.
How a Reverse Mortgage Works
A reverse mortgage works in an opposite way as a regular mortgage. This type of home loan is quite useful for people who are retired and have crossed their sixties. At this age, many individuals do not have enough savings left to pay-off their monthly expenses. However, what they might own is a residential property where they live.
For such individuals, banks and other financial institution have designed a facility called a reverse mortgage. Reverse mortgages allow property owners who are above 62 years of age to receive a monthly payment in exchange for giving up a certain amount of equity in their home.
As monthly payments accrue over time, the borrower of a reverse mortgage continues to lose equity in their home. The facility remains valid until the owner is occupying the house and can meet their monthly obligations like paying taxes and keeping the property in shape.
Monthly payments that a borrower receives can pay-off different types of expenses including medical bills and fuel. The loan is due once the borrower vacates the property. Monthly payments are made to the borrower until an occupant has left the property or the borrower loses his life.
You can apply for a Reverse Mortgage when you become 62 years of age. You have worked very hard to own your home, and the Reverse Mortgage can be a great way to help supplement your retirement income. The Reverse Mortgage is designed for many different purposes as you approach your golden years, and can be a huge benefit to you.
The following are some reasons why a homeowner would take out a Reverse Mortgage:
- Pay off your current mortgage
- Supplement your retirement income
- Pay for healthcare Expenses
Why A Reverse Mortgage Might Be The Right Mortgage
The way this type of mortgage works is it allows you to transfer part of the existing equity in your home into cash without having to sell your home or pay additional monthly bills.
A reverse mortgage is thought to be an ideal solution for seniors since it is treated as a separate loan. This means that the seniors can use the payments disbursed through a reverse mortgage to pay off their existing loans. Considering the difficulty that seniors face when trying to manage their finances, a reverse mortgage offers more flexibility and support as compared to refinancing an existing mortgage or a cash-out refinance. Similarly, since the possession of the home isn’t affected as long as you are making insurance and tax payments, seniors perceive this option to be more reliable. With such a mortgage option available, seniors are able to keep their savings untouched and use the cash flow generated through the HECM to take care of the household expenses.
The Difference Between a Reverse Mortgage and Typical Home Loan
Here is the main difference with a Reverse Mortgage. You do not make monthly mortgage payments anymore to your existing lender. What happens is you will receive money from the lender and do not have to pay it back as long as you live in your house. The Reverse Mortgage Loan is repaid when you die, sell your house, or when you do not have it as your primary residence.
What we offer at The Mortgage Network in Colorado is a (HECM) Reverse Mortgage, or Home Equity Conversion Mortgage, and this Reverse Mortgage is backed by the U.S. Department of Housing and Urban Development (HUD).
Before applying for a Reverse Mortgage with The Mortgage Network, you must meet with a HUD Approved Counsellor. The counsellor is there to explain all of the options for you, the upfront costs, and possible alternatives to a Reverse Mortgage.
How much you can borrow with a (HECM) Mortgage depends on several different factors, including your age, appraised value, and interest rate.
NOTE – A rule of thumb is the older you are, the more equity you have, and less you owe, the more money you will get.
Advantages of Reverse Mortgage
A reverse mortgage is a great way for cash-strapped retirees to earn a monthly income from their home without giving it on rent. Borrowers of this loan can avoid monthly mortgage payments by just maintaining the property and paying off taxes on time. Some of the significant advantages of acquiring a home loan include:
- A reverse mortgage is a great way of paying-off existing debts using a property that is needed by old age individuals.
- A major benefit of a reverse mortgage is that it is protected by the federal government against any downturn in the economy. In case the real estate market goes down and the property secured against reverse mortgage offers less value than the loan amount offered, the government will pay for the difference.
Here are the payment options for you when you choose a Reverse (HECM) Mortgage:
- A “term” options – fixed monthly cash advances for a set amount of time
- A “tenure” option – fixed monthly cash advances for as long as you reside in your home
- A line of credit that lets you draw down the loan proceeds at any time in amounts you choose until you have used up the line of credit.
- A combination of monthly payments and a line of credit.
How Can Borrowers Refinance Their Existing Facility into A Reverse Mortgage?
A borrower with an existing home loan facility can refinance it into a reverse mortgage as well. By refinancing their current facility in to reverse mortgage, borrowers can convert their debt into equity.
The secured property can be transferred to a new lender who is offering the borrower a reverse mortgage loan. A reverse mortgage loan can then be used to pay off monthly interest expense. The borrower needs to ensure that property remains in good condition until the loan tenure ends or until someone sells the property.
Eligibility Criteria for a Reverse Mortgage Loan
To be eligible for a reverse mortgage loan, the borrower must be at least 62 years of age and own the property. The house can be single family and multi-family as well. The applicant should be the sole owner of the property. It should be in good condition before taking out a loan.
The borrower should show proof that they can pay for property taxes, home maintenance, property insurance, and for the homeowners association.
Costs Associated with A Reverse Mortgage
- To cover for loan losses which may occur due to lower property value at the end of the loan term, borrowers of the reverse mortgage have to pay for the monthly insurance premium.
- Lenders charge an application fee to borrowers while disbursing the reverse mortgage loan.
- Closing costs apply while transferring the loan amount into an escrow account.
How Are Reverse Mortgage Loans Disbursed?
- A borrower may have access to a mortgage loan through different ways. These may include:
A line of credit – This allows the borrower to utilize the loan amount as much as they like. Interest on such home loans is applied only to the amount used. The only drawback of this type of disbursement is that interest amount may vary each month.
- Lump sum payment –For this type of facility, the loan amount can be disbursed on a lump sum basis. The borrower can use equal monthly installment every month to manage their expenses.
A few Myths about Reverse Mortgages Include:
- The Government/Lender Holds Ownership
- You Cannot Qualify If You have More Debt
- There are Monthly Payments
- You Can Lose the Home at Anytime
- Lenders are Interested in Selling the House
- The Home will not be Inherited by the Heirs
- There is no difference between a Reverse Mortgage and a Home Equity Loan
- The terms of the loan can be changed at anytime
If a reverse mortgage does not fit what you are looking for then consider some other types of mortgages such as:
A reverse mortgage is a great way to utilize personal property to generate cash on a monthly basis. Individuals who can not depend on 401k or social security should use this refinance facility to maintain financial stability after retirement.