Reverse mortgages are not for everyone. Some people feel that they are the last resort. But, if you’re considering one of these loans, there are some things you should know first. According to Mary Beth Franklin, a certified financial planner, and retirement expert, reverse mortgages can be scary. Until recently, if you didn’t sign a loan, your spouse could sell the house and take the proceeds without your consent. Although it’s frightening to sign up for this loan, it’s essential to understand that there are also pros. Weigh the pros and cons of whether to take one or not.
Interest Compounded Daily
One benefit of a reverse mortgage, whether it’s a reverse mortgages in California or another country, is that interest is compounded daily. Unlike a traditional mortgage, borrowers are not required to make monthly payments. However, they can make voluntary interest fees on their loans to reduce their debt and gain positive tax benefits. Reverse mortgage interest is calculated differently depending on how the funds are dispersed.
The loan term of a reverse mortgage lasts until the borrower dies and the borrower’s estate settles the outstanding loan balance. There are two interest rates on reverse mortgages: fixed and variable. The first type is set at the time of the loan, and the latter is subject to periodic changes in interest rate indexes. The current index for variable reverse mortgages is the one-year constant maturity treasury rate.
Less Money Left to Heirs
The Ameriprise Study found that about 80 percent of Baby Boomers want the money now, and only 30 percent want to leave the inheritance. As a result, many families face the difficult decision of how to best pass on the money. Reverse mortgages offer a way to ensure that your beneficiaries receive as much as possible when you die.
If you die with a reverse mortgage, your heirs should notify the lender as soon as possible. The lender will keep track of your death and notify your heirs. Your lender will also stop all payments on the loan and close the line of credit. The lender will then send a federally approved appraiser to your home to determine the market value. This will reduce the amount due to the lender to less than the remaining balance on the loan. The lender can also require your heirs to pay into a federal insurance fund.
Under the Garn-St. Germain Depository Institutions Act of 1982, a homeowner’s heirs can take over a mortgage when the home is sold. This non-recourse clause provides heirs with protections to keep them from owing more than 95 percent of the home’s value.
A non-recourse mortgage has stricter lending terms and a higher interest rate. On the other hand, a recourse mortgage has a lower interest rate, and the lender can collect on the collateral if the borrower doesn’t make the payments. Generally, the recourse loan offers lower interest rates and stricter terms, but lenders can still pursue other assets, garnish wages, and more.
Qualifications
Reverse mortgages can be advantageous for homeowners who are 62 years old or older. While the exact qualifications for reverse mortgages vary from lender to lender, a few basic requirements will generally be met. In general, applicants should be 62 years old, have a high home value, and have no debts or creditors. They should also have a clean credit history of at least 24 months.
Underwriters will look at the borrower’s credit and income when determining if they should be a good candidate for a reverse mortgage. A borrower must also meet the income guidelines set forth by HUD. The money earmarked for taxes and insurance will not accrue interest until it is used to pay these costs.
Costs
There are various costs associated with reverse mortgages. These fees may include document preparation, flood certification, pest inspection, property survey, and increased annual percentage rates. Another hidden cost is the responsibility to maintain the home in good condition. This can result in additional repairs and maintenance costs. These fees are added to the loan balance. Depending on the lender, the prices maybe 2% to 8% of the loan amount. However, these fees should not deter you from applying for a reverse mortgage.
To qualify for a reverse mortgage, an applicant must be 62 years old, own a primary residence, have sufficient equity, and live in the home. The lender will also require an approved adviser who will counsel the applicant. The rules for reverse mortgages are set by HUD, which ensures them. However, these rules can be expensive, so it is best to seek professional advice before applying for a reverse mortgage.
Loan Repayment
A reverse mortgage is a long-term loan that will enable you to keep your home without a monthly repayment. It is usually granted up to 60% of the current market value of your property. The loan can be paid in full in 20 years or in periodic payments. In the first year, you will pay interest of up to five percent of the loan amount.
A reverse mortgage matures when the borrower dies or leaves the home. The heirs must then decide whether to pay off the reverse mortgage loan. They may sell the house or use the property’s proceeds to repay the loan. Alternatively, heirs can decide to stay home and pay the balance themselves. The lender will then foreclose on the property if they do not receive a payment within six months. The heirs may delay the price for three months twice, but they can’t wait to repay for more than a year.
