How to Know if a Reverse Mortgage is Right for You – Part 1
Reverse mortgages are definitely one of the most helpful tools for people 62 years of age or more, allowing them to turn part of the equity of their homes into cash while at the same time keeping homeownership. Reverse mortgages are called like that because the mortgage cash flow is backward. So, instead of paying lenders on a monthly basis, lenders pay you every month, just like if you had a line of personal credit or a personal loan.
Also worth mentioning is that as long as you live in your home, you don’t need to pay every month toward the personal loan balance. However, you have to remain living at home and also have to be up to date with all the rest of your payments, like your tax and insurance ones for example.
Let’s take a better look at what reverse mortgages are and their types.
Types of Reverse Mortgages HECM
Also known as Home Equity Conversion Mortgage, HECM is federally-insured and regulated by the U.S. Government Department of Housing and Urban Development (HUD). Furthermore, the mortgages are issued by the Federal Housing Administration. There are actually two types of these mortgages:
– The Standard HECM: You receive funds money from your home’s equity and you don’t have to pay it back unless you die, sell, or move out. The upfront costs for this are high. For example, on a $200,000 home, the cost would be of $4,000. The annual premium for the ongoing insurance on that is 1.25 percent of the outstanding personal loan balance. So, in order to remain current, this mortgage insurance payment must be honored.
– The Saver HECM: This special kind of home equity mortgage was created in 2010 for homeowners who borrowed lower amounts. The benefits of this version is that it offers significantly lower upfront rates of only 0.01 percent, so the fee for the same $200,000 home we saw above would be only $20.
Now that we know about these two main types of mortgages, here are a few more things to know about them.
. These HECM reverse mortgages are private and backed by the companies that developed them in the first place.
. As we have seen, in most cases the upfront costs tend to be quite high.
. One of their main advantages is that there are no restrictions towards the income you receive, nor there are any medical requirements. In short, you can use your funds any way you want.
. In all cases, the final amount you can borrow will be based on several factors, such as age, mortgage type, home value, current market interest rates and more.
. These types of reverse mortgage are offered by both state and local agencies of the government, as well as by nonprofits. their target market is homeowners with low income, which is why they are so inexpensive when compared to other alternatives.
. It can be used for only one specific purpose and must be approved by the lender. Examples include an identified home improvement, home repair, or a tax payment WHO QUALIFIES
. Only homeowners of age 62 or older can apply.
. The home in question can be a single-family home that has to be occupied by borrower or it can also be a 2 to 4 unit home with one of those units occupied by the borrower.
. It is mandatory that prior to getting the personal loan, you have to receive consumer counseling information with a fee of around $125. This counseling session allows you to know and learn about all aspects of the process, including fees, premiums and all remaining charges.
That’s about it for now. On the next (and last) article about reverse mortgages, we will keep taking a better look at them and to how they are far more than mere personal loans. But most importantly, we will provide you with the most information we can for you to decide if they are the right thing for you.