I’ve been seeing ads on TV lately for reverse mortgages. So how do we know if they are for us?
A reverse mortgage converts part of your home’s equity into cash. You don’t have to repay until you no longer use your home or fail to meet the obligations of the mortgage.
Can you use a reverse mortgage?
- Are you 62 years of age or older?
- Paid off all your mortgage?
- Or have a low mortgage balance that can be paid off at closing from the reverse loan?
- Live in your home?
- Have a single family, manufactured home built after July 1976, condominium, 1-4 unit home or townhouse? Usually coops are ineligible.
- Are planning on living in the home at least 3 more years?
- Not delinquent on any federal debt?
The amount you can borrow doesn’t have to do with income or credit score but rather your age, the current interest rate, the lending limit in your area and the value of your home. Usually the older you are and the more valuable your home, the more you can borrow and the lower the interest.
You still have to pay what sometimes is included in your escrow: homeowners insurance and taxes.
The loan becomes due to be repaid when you die or sell your home, do not pay your taxes, move, or allow your home to deteriorate. After death, your estate will pay the loan off with the selling of your home and your heirs would get whatever money was left over. So make sure to check with heirs on whether they want your home. If they do, the reverse mortgage is probably not the right solution because they will have to pay the loan back in another way besides selling the home.
You can get your money in six different ways:
- Equal monthly payments
- Equal monthly payments for a fixed period of months
- Line of credit that lets you get money from the loan at any time
- Line of credit plus monthly payments
- Line of credit plus monthly payments for a fixed period of months
- Lump sum
Until Dec. 31, 2010 the loan limit for reverse mortgages is $625,500. You can use the money for anything.
Costs of a Reverse Mortgage
- Survey $300-$500
- Title, Attorney, County Fees
- Title insurance
- Origination Fee (no more than 2% of first $200,000 and 1% over $200,000. The maximum loan origination fee that can be charged is $6,000.)
- Usually you have to pay a $30-$35 per month service fee – often added to the monthly balance of the loan
- Mortgage Insurance – 2% of appraised value of the home and a monthly premium of .5% of the loan balance
- Appraisal $300-$500
Reverse mortgages usually cost about $5000 more than other types of loans. Interest isn’t paid out of your loan, but rather compounds until repayment. The borrower can’t owe more than the value of the property.
A reverse payment doesn’t affect Social Security or Medicare benefits. However, it can affect Medicaid, SSI or other public benefits.
You are required to talk with a Home Equity Conversion Mortgage (HECM) counselor before you get a reverse mortgage. They will talk with you over the guidelines of reverse mortgages in person or one the phone. Make sure you talk to a counselor approved by the Department of Housing and Urban Development.
If you are thinking a reverse mortgage might be right for you, your next step would be to find a reputable HECM counselor.
(FatWallet finance discussion of this topic, “Reverse Mortgage Info”)
This is a guest post from Andrew Wang who publishes Selling Time Share.