REVERSE MORTGAGES: TAPPING YOUR HOME FOR RETIREMENT INCOME
The Reverse Mortgage has long been viewed as a last resort for older Americans with home equity but little cash. Regulators and financial services firms are hoping that changes and reverse mortgages become a mainstream financial strategy. You should be cautious about jumping in. First the basics: A reverse mortgage is a type of loan which allows seniors to access the equity in their homes without having to pass credit or income requirements. The qualifications for a reverse mortgage include the owner being at least 62 years old, that the home is occupied by the owner and that the owner has equity in the home.
The loan can be taken as a lump sum, lifetime payments, or a line of credit. It doesn't have to be repaid until you move or die.
Total Annual Loan Cost
Although the interest rate on an HECM mortgage is set by the government, and the origination cost of an HECM loan is limited to 2% of the value of your home, the total cost of the loan can still vary by lender. Furthermore, in looking for a lender, borrowers must consider third-party closing costs, mortgage insurance, and the servicing fee. To assist borrowers in comparing mortgage costs, the federal 'truth-in-lending law' requires mortgage providers to present borrowers with a cost disclosure in the form of the total annual loan cost (TALC). Do be sure to use this number when comparing loans from different vendors; just keep in mind that the actual costs of a reverse mortgage will depend largely on the income options selected.
Interest Rates
The interest rate on HECM reverse mortgages is tied to the one-year U.S. Treasury security rate. Borrowers have the option to select an interest rate that can change every year or one that can change every month. A yearly adjustable rate changes by the same rate as any increase or decrease in the one-year U.S. Treasury security rate. This annual adjustable rate is capped at 2% per year or 5% over the life of the loan. A monthly adjustable rate mortgage(ARM) begins with a lower interest rate than the ARM and adjusts each month. It can move up or down 10% over the life of the loan.
A reverse mortgage is typically structured so that the total loan amount, including interest and fees, will not exceed the value of the home over the life of the loan. However, if the proceeds from your home's sale exceed the balance of the loan, then you, your spouse, or your heirs will receive the difference. Should the sale not cover the loan balance, then, in most cases, the lenders insurance will cover the difference.
As with conventional mortgages, reverse mortgage lenders make money the old-fashioned way: through interest, origination fees and points. The interest rate varies according to the market. However, closing costs are significantly higher with reverse mortgages.
In addition, borrowers continue to be responsible for real estate taxes, conventional homeowners insurance and home repairs, and have the added burden of paying for mortgage insurance, too.
Why would borrowers have to pay mortgage insurance? After all, that insurance is required for regular mortgages if borrowers don't have a large enough down payment, and its purpose is to protect lenders in the event of a default. With a reverse mortgage, there's no such risk to lenders.
But other risks exist. Mortgage insurance guarantees the lender will receive its full repayment. For example, a decrease in the property's value adversely affects the lender's reimbursement. Mortgage insurance also covers the lender in the event the mortgage is held over a very long period of time and accrued interest exceeds the value of the home.
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