If you are 62 years of age or older, and own your home, chances are you have asked “What is a reverse mortgage?” First started in 1961, reverse mortgages quickly became popular to those who were close to retiring and wished to stay in their current home. It didn’t take long for before the government decided to insure them by the Federal Housing Administration (FHA). Though it can sound complicated, a reverse mortgage is definitely something you should consider. So, what is a reverse mortgage you ask?
Simply put, a reverse mortgage is where the lender pays the home owner, instead of the homeowner paying the lender. Ironic, right? However, it gets a little more complicated. In order to qualify for a reverse mortgage, there must be equity in the home. (Equity is where the home is worth more than is owed on it.) Therefore, those who stand to benefit the greatest from a reverse mortgage are those who own their homes free and clear.
Reverse Mortgage California Tips from the Experts
Requirements for a Reverse Mortgage in California
Similar to a traditional mortgage, there are certain requirements that must be met in order to qualify for a reverse mortgage:
Each person listed on the deed must be 62 years old or higher.
The reverse mortgage company must be the primary lien on the property. This simply means that the money received from the reverse mortgage must be used to pay off the existing lien, if one exists.
The home that is being used in the reverse mortgage must be the primary dwelling place. Therefore, vacation homes or other types of properties do not qualify.
The borrower is still responsible for all taxes owed on the property, as well as maintaining insurance.
The borrower is responsible for maintaining the condition of the property, including any repairs that might come up.
The will or estate paperwork must show the home going to the lending company. This can be bypassed is the surviving heirs pay the remaining of the mortgage balance.
Types of Reverse Mortgages
Though one is more popular, and most commonly used, there are two basic types of reverse mortgages:
Home Equity Conversion Mortgage
A Home Equity Conversion Mortgage, or HECM, is a loan issued by the lender, but is still insured by the FHA. Therefore, there is a 1.25% insurance fee added on to the loan balance, and paid each year. This protects both the borrower two ways: if the lender is unable to make a payment or the value of the property at the time of sale is not enough to cover the balance of the loan.
HECMs are the most common type of reverse mortgages, which also come with their own sets of regulations. For example, for a HECM, the borrow is required to undergo counseling before proceeding.
Proprietary Reverse Mortgage
Though very few Proprietary Reverse Mortgages exist, the market may change, causing values to stabilize which, in turn, would make these more appealing. This type of reverse mortgage is privately insured by the lending company and are not subject to the same rules and regulations as the HECM, though most lenders tend to stay with the same consumer protection practices.
Another major difference is that Proprietary Reverse Mortgages are usually issued on homes of greater value, generally more than $750,000.
Features of a CA Reverse Mortgage
When deciding if a reverse mortgage is right for you, it is best to examine all of the features and decided from there if you wish to proceed. Remember, there are several factors that determine how much money you will actually get:
Age– The lender will decide this from the age of the youngest person on the deed. The older you are, the higher your payout will be.
Current Financial Status– The lender will determine if you are able to continue to pay the necessary taxes, fees, and insurance associated with owning the home. They will also examine the income streams of the borrows. This is done by the borrower providing tax returns and bank statements.
Value of the home– The lender will not only look at the current value, but also the predicted value at the time of the maturity. Is the case of a reverse mortgage, the maturity date is fluid, since it is based off of when the last person on the deed passes away.
Remember, there will be a limit to the amount of funds available within the first 12 months. Though this amount can depend on the lender, it is usually 60%. There are exceptions to this. For instance, if the balance owed on the home is greater than the 60%, the lender can release the funds necessary to pay off the current mortgage, plus an additional 10%.
After the twelve month, the borrow can take out as much, or as little, as they want. Also, if the lender decides the borrow will be unable to pay the needed taxes and fees, they made decide to hold that amount back to pay those fees.
Also, keep in mind that the ownership of the home always stays with the person or persons listed on the title. The lending company will never, at any point, own the home, even after the last person listed vacates the property. It’s at the time, though, that the loan becomes due. If it’s not paid, the foreclosure process can begin.
What is the cost?
The nice thing about reverse mortgages is that there are little to no cost out of pocket for the borrower. This is due to the fees for the loan being takin out of the loan payments. As far as overall cost, such as insurance and interest, this is determined by the lender. This is, however, where a reverse mortgage can become unappealing. Think of it this was; with a traditional mortgage, as you make payments, the balance that you owe decreases. With a reverse mortgage, as the lender makes payments to you, the balance that you owe rises. That why, at the time of the borrower either sells the house, or passes away, it is possible to owe more than the house is worth. This is simply because of the interest and insurance fees being factored in.
The beauty of the HECM reverse mortgage is that, since it is insured by the FHA, the borrow will never have to pay more than the appraised value of the home. Yes, you read that right. IF it comes time to pay back the balance, and the loan balance is greater than the value of the home, the federal government absorbs that lost. That why being insured by the FHA makes the HECM more common.
How can a reverse mortgage be paid out?
For a HECM reverse mortgage, there are several options on out you can receive the payout:
Line of Credit-Being the most common option, starting a line of credit simply allows you to withdraw the funds as they are needs. Most of the time, the line of credit has a feature that allows the unused balance to grow. Different from interest, it simply takes into consideration that you are one year older and the home has gained value.
Term Payments-This option allows you to receive a monthly payment over a set amount of time. For example, if you wish to defer drawing social security benefits until you are 72, you can receive payments from your reverse mortgage until then.
Tenure Payments-This option gives the borrower a set monthly payment for as long as they live in the home. In this option, the payments only stop if you die, or leave the home, even if the loan balance exceeds the value of the property.
Each of these option can be modified to fit the needs of the borrower, as long as it is approved by the lender. The beauty is that there is not a limit on how you use the money. After all, it is your money. You are able to pay off debts, healthcare cost, even take a much needed vacation. Whatever you do, insure you are able to stay in your home. That was the reason for the reverse mortgage being created.
As with any financial decision, it is best to research every option available for you. If you are in dire need of funds, it is issue to make rash decisions that you will regret later on. Also, getting a reverse mortgage may not be popular with your family members. That is why it is best to always speak with them before making any decisions. After all, once you are gone, they will be the ones left to deal with it.
Your children may have questions; that is perfectly alright. It doesn’t mean they don’t trust you. It just simply means they are looking out for your best interest. Take the time to answer their questions and allow them time to soak all of the information in. IF they have concerns, let them voice them and help you make the right decision. They may have other options you could find useful.
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