How does a reverse mortgage work?

The most important element is the know-how regarding the setup and working of Reverse Mortgage and for the purpose it is necessary to clearly understand what Reverse Mortgage is.

WHAT REVERSE MORTGAGE IS?

There is no rocket science to understand this term it is exactly what it sound like, a “mortgage in reverse”. You make payments on your homes principal when you get the normal mortgage from lender where each payment means you are building up equity in your home. It is not the case in reverse mortgage, here instead of making payments you take payments from the equity you’ve built. Simply, the bank is lending you the back money that you’ve already paid on your home but charging you interest at the same time. It is a type of home equity loan that does not require monthly payments. Usually this money is tax-free and typically does not affect your Social Security benefits.

HOW DOES A REVERSE MORTGAGE WORK?

Let’s come to the working process of reverse mortgage after knowing what actually it is. Reversed mortgage mostly target the senior citizens who have tight budget, fixed income and a majority of their house paid off. The most appealing part of reverse mortgage is that you don’t have to pay interest or mortgage until you sell your home. Quiet fascinating but all that glitters are not gold! The hard reality is, if you die before you’ve sold your home your inheritors will stuck with two options. Either they have to pay off the full reverse mortgage and all the interest that’s paid up over the years OR they have to give the bank your house. Both two options are not fascinating for heirs at all. It seems like reverse mortgage could be a helpful cash-flow option for people in their retirement but honestly these mortgages put senior citizens as well as their inheritors at financial risk. Basically all reverse mortgages works the same way but there are three main types in which reverse mortgage works.

  1. FHA’s HECM Reverse mortgage
  2. Proprietary Reverse mortgage
  3. Single-use Reverse mortgage

Let’s discuss each type in detail for our readers understanding.

  • FHA’s HECM Reverse Mortgage: Home Equity Conversion Mortgage is the most common type of reverse mortgage that most people use. It was created in 1988, in order to help senior citizens of America to make financial ends meet by allowing them to tap into the equity of their homes without having to move out. HECM is usually the reversed mortgage that you see advertised late at night in celebrity-endorsed commercials. Who can qualify for this mortgage? Homeowners who aged 62 and older can qualify for HECM loans and use the proceeds for any purpose.  Mortgagors can use this money freely however they want to use, from paying their bills to taking vacations. But the consequences can be huge.

The loan supplies are firmly controlled by the FHA (Federal Housing Administration) along with an arm of the HUD (Department of Housing and Urban Development). Moreover, mortgagors are required to pay hefty mortgage insurance premiums that protect the lender against losses.

  • PROPRIETARY REVERSE MORTGAGE: Proprietary in terms of mortgage means “private” or “privately owned or operated”. These mortgages are not federally regulated. Many states of America allow lenders to privately offer proprietary reverse mortgages outside the federally governed FHA/HECM system. Because of that many homeowners try to avoid paying mortgage insurance premiums, which sound like a better deal.  Without the involvement of federal government lenders are free to create their own requirements and restrictions for proprietary loans. Some lenders may bestow reverse mortgages that allow homeowners to borrow more of their equity. But the dark side is you have to pay much higher interest rates on these loans than federally insured reverse mortgages.
  • SINGLE-USE REVERSE MORTGAGE: The third type of reverse mortgage is often offered by government agencies at the state and local level and by numerous non-profit groups. The major key to a single-use reverse mortgage is that the lender OK’s how the money will be used before the loan is approved. Like proprietary reverse mortgage this type of loan is also not federally insured, and lenders are not required to charge expensive mortgage insurance premiums. Single-use reverse mortgage are typically for much smaller amounts than HECM loans or proprietary reverse mortgages.

WHO CAN QUALIFY FOR A REVERSE MORTGAGE?

As we give above brief intro who can qualify for reverse mortgage, a person who is 62 years of age or above and own a paid-for home. Home must have to be your primary residence and you can’t owe any federal debts. Moreover, a person has to have the cash-flow to continue paying property taxes, insurance, maintenance, HOA fees and other home expenses. Along with the person your home must have to meet the certain requirements to get reverse mortgage. This mortgage is available on single-family homes and multi-family units up to fourplexes. The HECM program also allows this mortgage on condominium approved by the HUD.

THE DARK SIDE OF REVERSE MORTGAGE:

Reverse mortgage sounds so appealing but prior signing the contract it is better to see the ugly truth about reverse mortgage. These mortgages make your financial hardships worse with high interest rates and low payouts.

  1. With reverse mortgage you might be giving away your net worth: Homeowners who get a reverse mortgage are only allowed to tap into a small portion of their home’s value, about 40% according to the federal government rules. It means if you own a home worth $200,000 you can borrow about $80,000 but it doesn’t mean you’re going to receive all $80,000. You still have to pay fees on that amount.
  2. Homeowners likely owe more than your home is worth: The reverse mortgage market is filled with half-truths and lies and potential fraud. You’re probably familiar with the biggest lie: “You will never owe more than your home is worth” but is not true at all but you may likely owe more than your home is worth.
  3. You could lose your home: Yes, you can absolutely lose your house if you have a reverse mortgage. If you don’t pay your taxes or your HOA dues, how long you think will it be before someone comes knocking with a property seizure notice? Not very long at all!
  4. You’ll owe fees, lot of fees: Reverse mortgages are full of extra costs. Lenders can charge up to 2% of a home’s value in an origination fee. The amount of money goes up every year, every month and every day until the loan is paid off. New Homes Mercer County
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