If you are a senior citizen and find yourself in need of extra cash, the last thing you might want to do is take out a regular mortgage on your home, especially since you would have to make monthly payments that you may not be able to afford. But you do have other options. One of them is a reverse mortgage.
The Federal Housing Administration (FHA) and the U.S. Department of Housing and Urban Development (HUD) are responsible for several aspects of housing in the United States. One of their responsibilities is to help senior citizens like you to access their home equity and use it for other purposes by means of home equity conversion mortgages, or HECMs, which are also known as reverse mortgages.
How Reverse Mortgages Can Help You
When you apply for a standard mortgage application you are required to pay back the loan in monthly installments. In this case, the reverse will be true. You will actually receive monthly payments (unless you request lump sum payments). The loan is based on the value of your home. Part of the home’s equity is converted to cash so that you can pay bills, make home repairs, or perform other necessary maintenance. This special type of loan through the FHA can be quite useful because there is no need to pay it back right away. It is only due to be paid if you move out of your house or violate the written terms of the mortgage.
The nice thing about this sort of home equity mortgage is that it can give you ready cash for emergencies or unexpected major expenses as well. The funds, while often used by homeowners for home repairs, can really be used for anything you want. Some people even fill out this sort of loan application to get college funds for their grandchildren or otherwise help their families.
People Who Are Eligible for Reverse Mortgages
In order to apply for this type of home loan, you must be at least 62 years old and be taking out the loan against the place that you actually live. You can’t try to get a reverse mortgage on a vacation home or a family member’s home. It must be your own main residence. You also can’t already have a mortgage that you are paying off unless that mortgage can be paid in full around the same time that you start the new home loan.
It is important to know that, if you apply for a loan like this, you will still be responsible for paying taxes on your home, as well as insurance costs. Those bills will not go away. In fact, unless you can show that you are able to pay those ongoing bills reliably, your application for the loan is likely to be denied.
Properties That Are Eligible for Reverse Mortgages
One question you may have is how does a reverse mortgage work if you live in a non-traditional home or in an apartment complex? It’s true that single family homes are the primary homes that are eligible. But your home may still be eligible, even if it isn’t a single family building. For instance, condominiums and manufactured homes that are approved by HUD are also eligible. The same is true for homes with up to 4 units, as long as you are permanently using one of those units as your main residence.
Comparing HECMs to Home Equity Loans
A standard home equity loan (home equity credit line) needs to be paid back in monthly installments. If you were to take out a home equity loan, you would always have that monthly bill to pay until the loan was fully paid off. An HECM does not require monthly payments at all, making it a much more cost-effective choice if you are on a tight budget, as long as you are planning to stay in your home for a long time.
Determining the Amount Available to Borrow
The amount of money you can apply for this way depends on many things. Among them are your age and the age of your spouse (assuming that you have a spouse), the appraised sales value of your home, and whatever the interest rates are at the time of your loan application. Also, the FHA sets a maximum borrowing limit, which is subject to change. So, if the maximum limit is less than the appraised home value then that limit is as much as you can borrow.
What Happens to Any Leftover Assets?
In the event that your application is accepted and your mortgage is validated, and then sell your home or pass away, the full value that you borrowed will come up due, along with finance charges and interest. Any assets that still remain after that will belong to you or to your heirs.
Canceling the Reverse Loan After Closing
There is a legal term called “right of rescission” that applies to reverse loan loan applications. In simple terms, it means that you have the right to change your mind and cancel your loan at any time up to three days after closing paperwork is signed. However, exact loan cancellation processes vary from one lender to the next. So you should familiarize yourself with your lender’s process before you ever reach that point, just in case you need to cancel the process at the last minute.
Receiving the Loan Payments
You can receive the loan payments in a number of ways. One option is to request line of credit payments, which are amounts that you choose given to you only when you need them. You can request those until such time as the equity in your home is used up. Another option is to receive what are known as monthly tenure payments, which occur every month for as long as you live in the home. A third option is term payments, which are paid monthly like tenure payments, but only for a certain predetermined number of months. Of course, it is also possible to receive some lump payments and some term or tenure payments.
As you can see, a reverse mortgage is a flexible way to stay in your home while still obtaining the funds that you need. It’s simply a matter of contacting an FHA-approved lender through HUD to get an HECM. Legally, you can’t go through a lender that hasn’t been approved by them. After you select an approved lender they can walk you through the entire process from start to finish, but you should still educate yourself about the process ahead of time to avoid any surprises down the road.
Reverse loans are often terrible for seniors because the interest rates are usually higher than home equity loans and all the loan fees usually get rolled into the loan itself, just adding to the interest. If a senior has nothing, perhaps a reverse mortgage is their last resort, but a lot of seniors get swindled into them, thinking they’ll still have equity in the home to give their kids when in fact most of that equity is lost due to loan interest. In addition, the senior is still responsible for repairs since they’re still the owner, which can eat into the money from the reverse mortgage. Lastly, if a senior is moved to a long term care facility, after a year the loan has to be repaid.
A better option for most seniors is selling the house and moving into a smaller place, especially if the reverse mortgage is seen as the only way to survive.