Reverse mortgages are carefully constructed by the government with the intent of helping older adults while keeping them from being ripped off. Before you enter into a reverse mortgage it is imperative you understand exactly what you’re getting into. TV commercials can make it seem like a great plan, but it is not the best choice everyone. Here’s a look at 5 reverse mortgages to know so you can figure out your options.
Home Equity Conversion Mortgage: HECM is just another name for reverse mortgage. Although the rules vary by country, in the United States a reverse mortgage is for adults over the age of 62 and may only be given on the primary residence. A reverse mortgage is exactly what it sounds like: instead of paying to get equity in a home, you get paid for your equity in the home and you do not have to pay it back until you move or die. Many people prefer to receive monthly payments as a means of living, while some take a lump sum to pay off an existing mortgage or pay for a vacation with the proceeds from the reverse mortgage.
Approved Counseling Course: Before you can even start applying for a reverse mortgage, you must take an approved counseling course. An approved counselor helps individuals interested in taking out a reverse mortgage understand the process. The counselor should explain exactly how HECM works, how it will affect your taxes and finances, any hidden fees that might be present, and how you can receive the money from the reverse mortgage. It is extremely important to find a qualified counselor, as some counselors may not be as honest others.
Financial Assessment: Since the “homeowner” is still responsible for property taxes and home insurance, institutions that provide reverse mortgages perform a financial assessment to ensure you can afford the monetary responsibilities that will continue over the course of the loan. A financial assessment includes a thorough interview of your finances, proof of all income, bank statements, and an explanation of any credit issues. If the institution deems your income or ready cash insufficient you may either have to set aside a particular amount of money to cover insurance and taxes, or you may be denied the reverse mortgage.
Interest Rates: An interest rate is a percentage of the loan a borrower must pay in addition to the amount of the loan. A reverse mortgage may be on a fixed or adjustable interest rate. Fixed interest rates accrue interest on the whole amount of the loan. Adjustable interest rates accrue on a monthly basis based on how much you owe. Adjustable interest reverse mortgages tend to be a little more flexible in how you get your money; for example, if you choose to have a revolving credit line but don’t use a lot of it some months, there won’t be any interest added to the part of the credit line you leave untouched.
Principal Limit: The principal limit is a term that refers to the limit of how much money you can receive. It is determined by several different aspects. The maximum claim amount is the appraisal value of the home, how much it sells for, or the cap on an FHA mortgage. The principal limit will also take into account the age of the younger borrower (for example, if a couple are taking out a reverse mortgage, and one partner is 80, but the other is 66, the 66 year olds age will have more impact on the principal limit) and the interest rate (fixed or adjustable) expected on the loan. The US Department of Housing and Urban Development (HUD) created a table that takes these factors and determines the principal limit. This number is generally only about half of the maximum claim amount.
