Reverse Mortgage with
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Do you own a home and wish to capitalize on that ownership in the years to come? A reverse mortgage can be an excellent tool for your retirement planning with a great number of benefits! However, this financing path is not suitable for everyone. We want you to understand the benefits and drawbacks of a reverse mortgage loan to help you determine if it is the right option for you. This page is a good place to start.
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What is a Reverse Mortgage loan?
A reverse mortgage, also known as the home equity conversion mortgage (HECM) in the United States, is a loan insured by the Federal Housing Administration (FHA) which allows seniors age 62 or older to convert their home equity into cash to supplement their retirement income.
Who qualifies for a Reverse Mortgage loan?
To qualify for a reverse mortgage loan, the youngest borrower must be 62 years or older. The home under ownership is the primary residence, and is free or almost free of any existing mortgage repayment. In addition, borrowers must meet financial eligibility criteria as established by U.S. Department of Housing and Urban Development (HUD) as well as FHA minimum property standards.
Pros of a Reverse Mortgage loan
Different funding options available
A reverse mortgage loan can be delivered in numerous ways. A borrower can choose to take their funds as a lump sum, line of credit, term (steady stream of monthly advances for a specific period), tenure (monthly payments for the life of the loan), or a combination of these options. No matter which funding option is pursued, these funds can also be used to eliminate any existing mortgage.
No monthly payments
One of the key benefits of a reverse mortgage loan is that no monthly mortgage payments are required for as long as you live in the home and continue to meet your financial obligations and minimum property standards.
Unlike conventional loans, a reverse mortgage loan does not have to be paid back until either the last surviving homeowner passes away or moves out of the home. Typically, the home is sold by the estate after these “maturity events” and the funds are used to cover the repayment of the loan.
Another great advantage of a reverse mortgage loan is that it falls under a non-recourse loan. In other words, if the house is sold and there are not enough funds to pay off the mortgage loan, lenders have to accept the financial loss. The heirs are not personally liable for any amount of the mortgage that exceeds the value of your home. On another note, if there is extra money left over after covering the loan repayment, the heirs get to keep it.
Cons of an FHA loan
Reverse Mortgage Fees
One of the major drawbacks of a reverse mortgage loan is that the loan balance increases over time as interest on the loan and fees accumulate. There are three major fees that borrowers must pay: original fee paid to the lender, third party fee (appraisal, title, inspection, etc.), and upfront mortgage insurance premium (MIP) paid to the FHA. Generally, the costs of a reverse mortgage can be as high as $30,000-$40,000 and are rolled into the loan rather than financed directly through a borrowers’ pocket.
A reversed mortgage loan affects your estate. In other words, it will almost always decrease the equity in your home, which will leave less assets to your heirs.
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