Is a Reverse Mortgage Right for Me?

A reverse mortgage is a kind of home loan that converts a part of home equity into cash payment. The idea was conceived as a plan to help senior citizens with limited income to use the accumulated wealth as their home to cover basic monthly living or health care expenses.  Some choose to use assets to put into an annuity, more on that later.

How does it work?

This type of loan is called reverse mortgage as it just the reversed stream of traditional payback system. In a conventional mortgage system homeowner makes regular payment to lender. After each payment the equity of homeowner increases by the amount of principle paid in each installment.

In reverse mortgage, the same flow is reversed instead of making monthly payment to lender, the lender pays instalment to borrower. Any senior citizen opting for it can get annuity from lender for a fixed tenure. The borrower is not required to pay loan until the home is sold or vacated. As long as you live in the house you are not eligible to make any monthly payment towards the loan.

Who can get a reverse mortgage?

Reverse Mortgage is available for any homeowner over the age of 62 who doesn’t have any mortgage pending on them. If the home is jointly owned, then both owners must be over the age of 62 to qualify for this loan.

How much cash can be received?

The amount of cash that can be received depends upon a number of factors that includes age of borrower, location and worth of house and current interest rates. Generally older the person more equity he/she has in his/her home, hence he/she can receive more money. You can get an even more precise estimate using the calculator located here: http://reversemortgagealert.org/reverse-mortgage-calculator/

Different types of Reverse Mortgages

There are three different types of Reverse Mortgage:

Single purpose Reverse mortgage:

These mortgages are offered by some non-profit institutions, local or state government. The funds through this are limited for single purpose like renovation or taxes. Moreover this type also requires homeowners to qualify within a certain income group.

Proprietary Reverse Mortgages:

These are linked with the private companies that maintain ownership of the loan. The company picks up lenders to administer the mortgage. Although the qualifying restrictions are just few, this type of loan comes with considerable upfront fee.

Home equity conversion Mortgages (HECM):

This has become most popular form of mortgage since its introduction back in 1987. These loans are insured by Federal Housing Administration and are guaranteed by government to deliver the promise made by the loan.

HECM provide bigger loan advance at a much lower cost compared to the proprietary loans but if homeowner owns a high value home then it is possible to get a bigger loan through proprietary mortgage.

Benefits and Risks associated with the Reverse Mortgage

Senior citizens after retiring or leaving job find themselves with smaller pension amount and nominal social security benefits. Many of them can’t even cope with the rising health care cost and living expenses. Many others retire with outstanding debts which is quite difficult to pay with the nominal fixed income. This has encouraged the people to look towards reverse mortgage.

Benefits:

• Allows you to cash in your home equity without repaying the loan, as long as it is your prime residence.

• In most cases, loan doesn’t need to be paid until last borrower dies or home is sold.

• The payout from reverse mortgage is not taxable and doesn’t possess any risk to Social security benefits.

• There is no restriction for using money

Risk:

• Upfront costs are quite higher than traditional mortgage.

• Borrower is still responsible for taxes, insurance and maintenance related to home.

• Borrower is also responsible for expensive insurance that protect lender in case value of property decreases or mortgage is stretched over longer time period.

• As reverse mortgage being a rising debt loan, the interest continues to accumulate and this increases the debt hence reducing the equity.

• In some cases borrower may even lose their home if they vacate it for a longer duration for stay at a nursing home or hospital. Even if the borrower intended to return home lender may ask for repayment of the full loan along with the interest accrued.

Before making a decision that can directly affect your financial security and even your future, you should first explore all other available options to meet your need including annuities.  To find out more about annuites go to annuitypro.com

But if you still consider reverse mortgage then you should first compare different plans and discuss the need with your friends and family. It is also advisable to contact a reverse mortgage counsellor.

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