Reverse Mortgage
Monthly payment schedules of conventional mortgages are turned around in reverse mortgage i.e. instead of you making (monthly) payments to the mortgage company the company makes payments to you! The amount of cash you are entitled to receive from a reverse mortgage depends on a number of factors including your age, interest rate on your loan, amount of loan (and interest) paid back and the appraised value of your home etc. Reverse mortgage are an ideal option for people facing shortage of cash and owning a substantial percentage in their mortgaged home. Reverse mortgage allow you to meet your financial obligations without sacrificing ownership of your home. Proceeds from reverse mortgages can be used for absolutely any purpose ranging from financing home improvements/renovation to supplementing your retirement income/social security to meet your day-to-day expenses. Reverse mortgage differs from second mortgages and refinanced loans in that you are not required to start repaying the loan until you are no longer living your home.
Reverse mortgages have gained popularity recently because of their ability to fulfill immediate cash needs of customers from various target segments. Previously no product/service was available to meet the needs of this target segment making it difficult for people to fulfill their need for cash. Most companies offering reverse mortgages require you to be at least 62 years old before to qualify. Reverse mortgage allows you to retain ownership of your home even you vacate it permanently. Reverse mortgages also allow your descendents to pay back your loan after your death. Reverse mortgages also allow to the option to repay after you sell the house or are not residing in it. Most reverse mortgages do not set an upper limit on the amount of income you receive. Another benefit of reverse mortgages is that income you receive from them is tax exempt. Also income from reverse mortgages does not influence you Social Security and Medicare benefits. The loan amount on reverse mortgages is accumulated over time. Interest accrues on outstanding balances each month and is added to total outstanding debt to be paid at a later date. Most reverse mortgages are available in both fixed interest rates mortgages and adjustable interest rate mortgages. However, variable interest rate reverse mortgages are more common with interest rate fluctuating in line with the market index.
Make a smart decision when opting for reverse mortgages. Since most reverse mortgages allow you to utilize part or whole of your accumulated equity most lenders make the mistake of cashing out much more than is required to meet their immediate financial needs. Always remember the more equity you cash out lesser will be your share in your reverse mortgaged home leaving you with assets of no or little value in case emergencies or other cash needs. On the other hand you still have to shoulder various payments including your home insurance, home warranties, property taxes and other expenses. Keep in mind what may seem like a perfect solution to all your cash shortage problems may turn into a nightmare if not used wisely. Most people are thrown away by the idea of having enough cash to buy everything they ever desired! This is the mentality that reverse mortgage companies count on to possess the home of your dreams leaving with no or little assets to enjoy or gift to your heirs at the end of your life. You also need to take into account that several types of closing costs (required for a conventional mortgage) also apply to reverse mortgages. These fees may or may not be refundable depending upon the reverse mortgage company and amount of your reverse mortgage etc. Then undertake a cost benefit analysis to ascertain which one of these options is the most suitable for your needs. Some of the closing costs associated with reverse mortgages are:
- Attorney/Lawyers’ Fees – Lawyers’ fees are paid by one of both parties for the preparation of official documents (such as mortgage agreement and sales contract etc) and other legal services. Mortgage lenders and borrowers usually have their own attorneys who help them deal with nitty-gritty’s of various legal issues involved in a mortgage loan.
- Mortgage Application Fees – Mortgage application fees refer to loan processing fees paid by the buyer to the mortgage loan company. The application fees may be charged before or after closing the transaction at the discretion of the seller.
- Appraisal/Evaluation Fees – Appraisal/evaluation fees are usually paid by the buyer (and may be paid by the seller through mutual consent) to a Professional Appraiser. Appraisers’ services are required by most lenders as a precondition for advancing the loan and help ascertain fair value of the property in question.
Most reverse mortgage companies allow you to take a flexible tenure reverse mortgage depending on your specific needs. Some of the options available in the reverse mortgage market include:
- Term Reverse Mortgage - Term reverse mortgage pays fixed monthly installments for a specific period selected by the borrower.
- Modified Term Reverse Mortgage - Modified term reverse mortgage is a combination of line or credit and term types of reverse mortgage. Modified term reverse mortgage allows you to receive monthly payments for a fixed period decided by the borrower.
- Tenure Reverse Mortgage - Tenure reverse mortgage allows you to receive equal monthly payments as long as you live or live in the reverse mortgaged property.
- Modified Tenure Reverse Mortgage - Modified tenure reverse mortgage is a combination of line or credit and tenure types of reverse mortgage. Modified tenure reverse mortgage allows you to receive monthly payments for as long as you live in the property in question.
- Line of Credit Reverse Mortgage - Line of credit reverse mortgage is the most flexible type of reverse mortgage. It allows you to receive flexible payments whenever you want until the line of credit is exhausted.