Reverse Mortgage Explanation 2021-Billionaire Mentor

What is a Reverse Mortgage?

In a word, a reverse mortgage is a loan. A homeowner who is 62 or older and has home equity can borrow against the value of their home and receive money in the form of a lump sum, fixed monthly payment, or line of credit. Unlike a forward mortgage — the type used to purchase a home — the homeowner does not require a reverse mortgage to pay off any debt.

Reverse Mortgage
Reverse Mortgage Explanation

Instead, when the borrower dies, the entire loan balance becomes due and payable, goes away permanently, or sells the house. Federal regulations require lenders to structure the transaction, so the loan amount does not exceed the value of the home and the borrower or borrower's property is not held responsible for paying the difference if the loan balance is not in the home. Becomes larger than the value. One way to do this may be through a decline in the market value of the home; Another if the borrower lives longer.

Cash in Equity

Reverse mortgages can provide much-needed cash for senior citizens, whose total assets are mostly tied to the value of their homes. On the other hand, these loans can be expensive and complex, as well as subject to scams. This article will teach you how reverse mortgages work, and how to protect yourself from harm, so you can make an informed decision about whether such a loan can be right for you or your parents.

According to the National Reverse Mortgage Lenders Association, homeowners as young as 62 years old held $ 7.14 trillion in home equity. This number marks all high levels since the measurement began in 2000, underlining that a large source of wealth home equity is for adults with retirement age. If you sell or reduce or borrow against that equity, then home equity is simply usable money. And where reverse mortgages come into play, especially for retirees with limited income and few other assets.

key takeaways

(a) A reverse mortgage is a type of loan for seniors 62 and older.

(b) Reverse mortgage loans allow homeowners to convert their home equity into cash income with no monthly mortgage payments.

(c) Most reverse mortgages are insured, but be careful about reverse mortgage scams that target seniors.

(d) A reverse mortgage can be a great financial decision for some, but a bad decision for others. Make sure to understand how reverse mortgages work and what they mean to you and your family before making a decision.

How a Reverse Mortgage Works? 

With a reverse mortgage, instead of paying the landlord to the lender, the lender pays the homeowner. To receive these payments the homeowner has to choose this (we will explain the options in the next section) and only pay interest on the income received. The interest is rolled into the loan balance so that the homeowner does not have to pay anything. The homeowner also titles the house. Over the life of the loan, the homeowner's debt increases, and the equity of the home decreases.

As with a forward mortgage, the house is collateral for a reverse mortgage. When the homeowner moves or dies, the proceeds from the sale of the home go to the lender to repay the reverse mortgage principal, interest, mortgage insurance, and fees. Any further sales from the amount borrowed go to the homeowner (if he is still living) or the homeowner's property (if the homeowner has died). In some cases, heirs may choose to pay the mortgage so that they can keep the home.

Inverse mortgage incomes are not taxable. While they may feel like an income to the homeowner, the IRS considers the money a loan advance. 

Types of Reverse Mortgage

There are three types of reverse mortgages. The most common home equity conversion mortgage or HECM. HECM represents the offering of almost all reverse mortgage lenders at home prices below $ 765,600 and is the type you are most likely to get, so this article will discuss this type. If your house is worth more, however, you can look into a jumbo reverse mortgage, also known as a proprietary reverse mortgage. 

When you take a reverse mortgage, you can choose to receive income in one of six ways:

1) Lump-Sum: Once your loan is closed, get all the income. This is the only option that comes with a fixed interest rate. The other five have adjustable interest rates.

2) Equal Monthly Payment (Annuity): As long as at least one borrower stays in the house as the principal residence, the lender will make a steady payment to the borrower. It is also known as the tenure plan.

3) Term payment: The lender pays the borrower the same monthly payment for a specified period of the borrower's selection, such as 10 years.

4) Line of credit: The homeowner has money available to borrow as needed. The homeowner only pays interest on the amounts borrowed from the credit line.

5) Equal monthly payment as well as a line of credit: The lender provides a stable monthly payment for as long as at least one borrower occupies the house as the principal residence. If the borrower needs more money at any point, they can reach the line of credit.

6) Payback period as well as a line of credit: The lender pays the borrower the same monthly payment for a set period of the borrower's selection, such as for 10 years. If the borrower needs more money during that period or later, they can access the line of credit.

It is also possible to use a reverse mortgage called "HECM for purchase" to buy a different home than the one you are currently living in.

In any case, you will usually need at least 50% equity based on the current value of your home, not what you paid for it - to qualify for a reverse mortgage. Standards vary by lender.

Will you benefit from one?

A reverse mortgage can look like a home equity loan or line of credit. In fact, similar to one of these loans, a reverse mortgage can provide a lump sum or a line of loan, which you can use as needed based on how much your home is worth and the market value of your home. But unlike a home equity loan or line of credit, you do not need to have income or good credit to qualify, and when you occupy the home as your primary residence, you will not make any loan payments.

A reverse mortgage is the only way to access home equity without selling a home to senior citizens who do not want the responsibility of making monthly loan payments or who do not qualify for a home equity loan or refinance due to limited cash flow or deterioration Can. Credit.

If you do not qualify for any of these loans, what are the options for using domestic equity for your retirement? You could sell or reduce, or you could sell your house or children to keep grandchildren in your family, perhaps if you wanted to continue living in the house, they could also become their tenants.

Pros and Cons

When you are 62 or older, a reverse mortgage can be a good way to get cash when your home equity is your biggest asset and you have the money to cover your basic living expenses. There is no other way to get enough money. A reverse mortgage allows you to stay in your home as long as you live with property taxes, maintenance, and insurance and do not need to go to a nursing home or assisted living facility for more than a year.

However, taking a reverse mortgage means spending a significant amount of equity you have accumulated on interest and loan fees, which we will discuss below. It also means that you will not be able to send your home to your heirs. If a reverse mortgage provides a long-term solution to your financial problems, only a short term one, it may not be worth the sacrifice.

What if someone else, such as a friend, relative, or roommate, lives with you? If you get a reverse mortgage, the person has no right to stay in the house after you go.

Another problem that some borrowers run into with a reverse mortgage is outlining mortgage income. If you choose a payment plan that does not provide lifetime income, such as a lump sum or fixed plan, or if you take out a line of credit and use it, you have no money left over when needed.

Rules Governing these Mortgages

If you own a home, condo or townhouse, or a home built on or after June 15, 1976, you may be eligible for a reverse mortgage. Under Federal Housing Administration (FHA) regulations, cooperative housing owners may not receive reverse mortgages because they are technically not the owners of the real estate that they own in the corporation, but rather the shares. In New York, where co-ops are common, state law further prohibits reverse mortgages in co-ops, allowing them only in one-four-family residences and condos.

While reverse mortgages do not have income or credit score requirements, they still have rules that qualify. You must be at least 62 years of age, and you must either have your home free and clear or have sufficient equity (at least 50%). Borrowers will have to pay a basic fee, an upfront insurance premium, an ongoing mortgage insurance premium, a debt service fee, and interest. The federal government limits how much lenders can charge for these items.

If the borrower leaves the house to sell water, the borrower or his heirs cannot go after that. They should allow any heirs several months to decide whether they want to repay the reverse mortgage or allow the lender to sell the house to repay the debt.

The Department of Housing and Urban Development (HUD) requires all potential reverse mortgage borrowers to complete HUD-approved counseling sessions. This counseling session, which typically costs $ 125, should take a minimum of 90 minutes and cover the pros and cons of taking a reverse mortgage given your unique financial and personal circumstances. It should clarify how reverse mortgage may affect your eligibility for Medicaid and supplemental protection income. The counselor should also go through the various methods by which you can obtain.

Your responsibilities under reverse mortgage rules are to stay current on property tax and homeowners insurance and keep the home in good repair. And if you stop living in the home for more than a year - even if it is because you are living in a long-term care facility for medical reasons - you will have to repay the loan, which is usually completed by selling the house.

Important Note: In addition to scams targeting the elderly, there are some legitimate risks of reverse mortgages. Despite the recent reforms, there are still situations when a widow or widower may lose home after the death of her husband.

Fees included

The Department of Housing and Urban Development adjusted insurance premiums for reverse mortgages in October 2017. Since lenders cannot ask homeowners or their heirs to pay if the loan balance is larger than the value of the home, the insurance premium provides a pool of money. This can attract lenders, so they do not lose money when this happens.

A change increased from 0.5% to 2.0% for three of the four borrowers and decreased the premium from 2.5% to 2.0%, while it was 2.0% for one of the other four borrowers. Up-front premiums were used in the first year with how many borrowers, with homeowners who pulled out the most - because they needed to pay off existing mortgages - paying higher rates. Now, all borrowers pay the same 2.0% rate. The up-front premium is calculated based on the value of the house, so for every $ 100,000 in assessed value, you pay $ 2,000. On a $ 300,000 house it is $ 6,000.

All borrowers will also have to pay an annual mortgage insurance premium of 0.5% (formerly 1.25%) of the amount borrowed. This change saves borrowers $ 750 per year for every $ 100,000 and helps offset higher up-front premiums. It also means that the borrower's debt increases gradually, preserving more of the homeowner's equity over time, providing a source of wealth later in life, or being able to pass the house in succession. Increases the likelihood of.

Reverse mortgage lenders

To get a reverse mortgage, you cannot go to any lender. Reverse mortgages are a specialized product, and only a few lenders offer them. Some of the biggest names in reverse mortgage lending include American Advisory Group, One Reverse Mortgage, and Liberty Home Equity Solutions.

It is a good idea to apply for a reverse mortgage with many companies to see which has the lowest rates and fees. Although reverse mortgages are regulated regularly, there is still no barrier to what fees each lender can charge.

Rate of interest

The only lump-sum reverse mortgage, which provides you with all the income at a time when your loan is closed, has a fixed interest rate. The other five options are adjustable interest rates, which makes sense because you have been borrowing money over many years, none at all, and interest rates are always changing. Variable-rate reverse mortgages are tied to the London Interbank Offered Rate (LIBOR). 

In addition to one of the base rates, the lender adds a margin of one to three percentage points. So if LIBOR is 2.5% and the lender's margin is 2%, then your reverse mortgage interest rate will be 4.5%. As of January 2020, lenders' margins ranged from 1.5% to 2.5%. Interest compounds over the life of a reverse mortgage, and your credit score does not affect your reverse mortgage rate or your ability to qualify.

How much can you borrow?

The income you get from a reverse mortgage will depend on the lender and your payment plan. For a HECM, the amount you can borrow will be based on the age of the lowest borrower, the interest rate of the loan and the estimated value of your home, or the maximum claim amount of the FHA, as of January 1, 2020, $ Is 765-60000.

However, you cannot borrow around 100% of the value of your home, or anywhere else. Part of your home equity should be used to pay off the loan expenses, including mortgage premiums and interest. Here are some other things you should know about how much you can borrow:

(a) Loan income is based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not the borrower. The youngest the borrower, the higher the loan amount.

(b) The lower the mortgage rate, the more you can borrow.

(c) The higher the appraised value of your property, the more you can borrow.

(d) A strong reverse mortgage financial assessment increases the income you receive because the lender does not win part of them to pay property taxes and homeowners insurance on your behalf. 

The amount you can actually borrow is called the initial principal limit. In January 2018, the average initial principal limit was $ 211,468 and the average maximum claim amount was $ 412,038. The average borrower's initial principal limit is approximately 58% of the maximum claim amount.

The government lowered the initial original threshold in October 2017, making it harder for homeowners, especially young people, to qualify for reverse mortgages. Conversely, the change helps borrowers to more protect their equity. The government reduced this limit for the same reason when it changed insurance premiums: because the mortgage insurance fund's losses nearly doubled in the previous fiscal year. It is the fund that pays lenders and protects taxpayers from reverse mortgage losses.

To make things more complicated, you cannot borrow all of your initial core limits in the first year, choosing a lump sum or a line of credit. Instead, if you are using the money to pay off your further mortgage, you can borrow up to 60% or more. And if you choose a lump sum, you will get all the amount you raise. If you choose a line of credit, your credit line will increase over time, but only if you have unused funds in your line.

A Reverse mortgage, your spouse and heir

Both spouses must consent to the loan, but both should not be borrowers, and this arrangement can cause problems. If two spouses live together in one house, but only one spouse is named as a borrower on a reverse mortgage, the other spouse is at risk of losing the home, if the borrowing spouse Dies first. When the borrower dies, he has to repay the reverse mortgage and it is usually repaid by selling the house. If the surviving spouse wants to keep the home, they will have to repay the loan through other means, possibly through an expensive refinance.

Only one spouse can be a borrower if only one spouse holds the title of the house, perhaps because it was inherited or because it is owned before marriage. Ideally, both spouses would hold the title and both would be borrowers on reverse mortgages so that when the first spouse died, the other would have access to the reverse mortgage income and stay in the home until death. Non-browsing spouses may also lose the home if the borrower's spouse wants to help in the nursing home for a year or more.

Avoiding reverse mortgage scam

Potentially attractive as a reverse mortgage and with a vulnerable population of borrowers, who may suffer cognitive impairment or seek financial freedom, prevents scandals. Unscrupulous vendors and home-improvement contractors have targeted senior executives to help secure reverse mortgages for home improvements - in other words, so that they can pay.

The seller or contractor may or may not actually deliver on the promised, quality work; They can only steal the money of the owner of the house.

Relatives, caregivers, and financial advisors have also taken advantage of seniors by using the Power of Attorney to mortgage the house, then by stealing the proceeds, or by convincing them to purchase a financial product, such as an annuity or the entire financial Insurance, seniors can only afford by obtaining a reverse mortgage. This transaction is likely to be only in the best interests of the so-called financial advisor. These are some of the reverse mortgage scams that unwitting homeowners may visit.

Do this to avoid foreclosure

Another danger associated with a reverse mortgage is the possibility of foreclosure. Although the borrower is not responsible for making any mortgage payments - and therefore cannot be mistaken on them - a reverse mortgage requires the borrower to meet certain conditions. Failing to meet these conditions allows the lender to foreclose.

As a reverse mortgage borrower, you need to live in the house and maintain it. If the house becomes disordered, it will not have a fair market value at the time of selling, and the lender will not be able to reclaim the full amount, which it has extended to the borrower. Reverse mortgages are also required to hold current mortgages on property taxes and homeowners insurance. Again, the lender imposes these requirements to protect its interest in the home. If you do not pay your property tax, your local tax authority may seize the house. If you do not have home insurance and the house is on fire, the lender has collateral damage.

Fact: According to an analysis by Reverse Mortgage Insight, one of five reverse mortgage foreclosures from 2009 to 2017 was caused by the borrower's failure to pay property taxes or insurance.

Bottom-line

A reverse mortgage senior can be a helpful financial tool for homeowners who understand how the loan works and the trade-offs involved. Ideally, anyone interested in taking a reverse mortgage will take time to fully learn about these loans. That way, no unscrupulous lender or predatory scammer can prey on them, even if they get a poor-quality reverse mortgage counselor and cannot take the loan, and the loan does not come with any unpleasant surprises.

Even when a reverse mortgage is issued by the most reputable of lenders, it is still a complex product. Borrowers should take the time to educate themselves about how to ensure that they use the equity of their home.


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