A reverse mortgage is one of the most convenient ways to make money in retirement. Longer life expectancy and increasing costs of living mean many retirees find themselves not having enough funds. A reverse mortgage may literally be a life saver in this situation.
You can use a reverse mortgage to pay off traditional mortgages, consolidate debt, make home improvements, create an emergency fund, or simply supplement your income. These are the most popular reasons people go for reverse mortgages. But it’s your money and you can do anything you want with it.
This article focuses on all you need to know about reverse mortgages to decide if it is right for you. Here you go.
1. Understand The Concept of Reverse Mortgage
As the name implies, a reverse mortgage is the reverse of a traditional mortgage. In a reverse mortgage, the lender pays you by converting part of your home’s equity into payments for you. Reverse mortgage payments are usually tax free and the loan is due for payment when you die, sell your home, or move out. The loan is usually recouped by selling the home.
To qualify for a reverse mortgage, you must be at least 62 years old, own a home, and live in your home. You’ll have to maintain your home and keep up with property taxes and other payments. Depending on the type of reverse mortgage you intend to get, you may need to attend a counseling session to learn more about the loan you are signing up for.
2. Different Types of Reverse Mortgage
There are three different types of reverse mortgages namely single-purpose reverse mortgages, proprietary reverse mortgages, and Home Equity Conversion Mortgages (HECMs). You are allowed to borrow money against your home for a specific landed approved goal or purpose in a single-purpose reverse mortgage.
Proprietary reverse mortgages are usually offered by private lenders and are not backed by the government. They also tend to offer loans that exceed federal loan limits.
HECMs are the most popular type of reverse mortgage and are insured by the Federal Housing Administration (FHA). You are allowed to withdraw some of your home’s equity and choose how you want to withdraw your funds. There are options for a lump sum, a fixed monthly amount or a line of credit, or a combination of both
3. Knowing The Amount of Money You Can Get From a Reverse Mortgage
It’s important you have a solid estimation of the amount you can get from a reverse mortgage. And you can do this by using a reliable reverse mortgage calculator. Not all calculators are made equal and some are just there to sell your information to lenders. So, use a calculator from a reputable lender.
You may be able to get up to 60% of your home’s equity although the exact amount you get depends on factors such as the amount of equity in your home, current interest rate, and so on. Closing fees should also be considered when determining the amount of money you can get from a reverse mortgage. It’s common to use proceeds from the loan to pay closing fees.
4. Costs Associated With a Reverse Mortgage
As you may already know, there are some costs associated with a reverse mortgage. Typical costs include upfront mortgage insurance premium (MIP) that is paid to the FHA at the time you close your loan. This way, the loan is insured and both you and the lender are protected.
There is also the origination fee which is the amount your lender charges you for originating and processing your loan. As per FHA regulations, there is a minimum and maximum amount you can pay as origination fees. The minimum is $2500 while the maximum cost is $6000.
Other costs include servicing fees, appraisal fees, third-party charges, and interest rates. The lender should explain all of these fees to you. This way, you know exactly what to expect.
5. Compare Fees and Costs
It’s important you shop around and compare fees and costs from different lenders. In most cases, lenders will offer the same or very similar mortgage insurance premium. However, the associated costs such as interest rates, closing costs, and origination fees tend to vary among lenders. So, before you commit to any lender, shop around to ensure you are getting a good deal.
6. You Have a Right to Cancel
Most reverse mortgages give you the option to cancel the deal for any reason after three business days. This is usually referred to as the right of “rescission.” Usually, you’ll have to notify the lender in writing and send the letter by certified mail to cancel. The lender will then return any money you paid within 20 days.
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