Reverse mortgage information is available all over the internet and on TV, yet you need to be careful with this. Although it is a viable source of additional retirement income, you need to make sure your information resources aren't merely trying to "sell" you while caring less if it's really the right thing for you to do!
What The Ol' Boomer will try to do here is give you some basic reverse mortgage information (aka reverse annuity mortgages) and links to good third party websites where you can dig deeper into this subject.
You've probably seen the ads on TV: If you own your own home, you can get money, never make a mortgage payment again, and stay in your home as long as you need to. What is this magical thing that could do all this for you -- provide you financial means and let you stay in your home besides?
It's called a reverse mortgage, or a reverse annuity mortgage. It can be a good idea, but there are some caveats before you decide you want to take one out, or you decide you want to advise someone, such as an older relative or parent, that they should take one out.
Reverse Mortgage Information in a Nutshell
A reverse mortgage is a loan you take on your house's equity, so it's not "free" money. The law states it doesn't have to be paid back until the homeowner dies, the house is sold, or the homeowner moves out for a year or more. If a married couple owns the house and a spouse dies, the surviving spouse can stay in the home without having to pay back the reverse mortgage until he or she sells, moves out for 12 months, or dies. The most common of these reverse mortgages is the Home Equity Conversion Mortgage, insured by the Federal Housing Administration, and is the only one being offered right now. Private reverse mortgages were once available, but right now, lenders are not offering them because of the credit crunch.
What do reverse annuity mortgages mean to you?
A reverse mortgage lets you stay in your home and tap into your home's equity. You can get the money as a lump sum, monthly draws, or as a line of credit, and you have to repay it with interest, as with any loan. The difference is, you pay the loan off all at once at the end of the loan period instead of making monthly payments as you do with a traditional mortgage. (If you die before loan repayment, your estate will repay the loan.)
During this process, you retain ownership and title of the house, you need to pay the cost of insurance and repairs, and you need to pay property taxes as well. You can't have a regular mortgage if you want to take out a reverse mortgage. You'll either need to pay off the regular mortgage before you take out the reverse mortgage, or you can use part of the proceeds from the reverse mortgage to pay off the regular mortgage. As long as you keep up with repairs, taxes and insurance, AND you stay in the house, you don't have to pay the loan back.
Some reverse mortgage information considerations.
There may be some times when a reverse mortgage isn't going to be a good idea. For one, interest costs generally accumulate pretty steeply, so that if you take out a reverse mortgage at the minimum age of 62 and stay in your house until you're in your 80s, you could owe a lot more in interest than you do in principal payments. If you decide you want to move to an assisted-living facility, for example, you may not have the money left to do so once the loan is paid off. Therefore, it's not a good idea to take out a reverse mortgage if you think you may be moving to assisted-living or a nursing home at some point.
However, there are some advantages to reverse mortgages, too. Because reverse mortgage programs covered by the federal government have a "nonrecourse" feature, you won't have to pay back more than the house is worth at the time it's sold. There's insurance that will cover the difference if the debt on the loan exceeds the sale price of the house.
In addition, the money you receive from your reverse mortgage isn't taxable, but you can't deduct the interest on your tax return every year, either. Once the loan is paid off, you can write off part of the interest based upon IRS rules.
If you leave your house to someone, he or she will have to pay off the reverse mortgage when you die. If the debt is worth more than the house, the person inheriting the house is going to have to cover the difference. The insurance shortfall protection will kick in if the house is sold, which your heirs must do within what is generally six months. They can ask for an extension of up to six months more, or 12 months total, with a written request.
Is there a "best" way to take out a reverse mortgage?
The line of credit is generally the most recommended way to take advantage of a reverse mortgage, because you can use it as you need it and leave it alone when you don't. Whatever you don't use with a line of credit isn't going to accrue interest, with the amount you can "tap into" growing larger over time. In general, your interest rates are not going to be fixed if you take out a line of credit, although they will generally be fixed if you take out a lump sum.
Costs besides interest
A reverse mortgage is going to cost you 2% on the original loan and 1% on the balance, with a cap of $6,000. This cap will vary with inflation. There are also closing costs to pay, as with any mortgage, and this will cost you several thousand dollars.
You'll pay insurance premiums for FHA insurance as well, which guarantees that you'll get your money and that the lender will eventually get its money, too. Your premium is going to be 2% of the home's value or the lending limit, whichever is less, and 0.5% of the mortgage balance as a premium on a yearly basis.
To ensure the loan servicing fee is going to be paid, an additional $30 to $35 a month in general will be set aside, too.
Total costs could be valued at 10% of the total loan amount, which makes a reverse mortgage loan a good idea only if you're going to stay in your home and have a long-term rather than short-term need for cash. Nonetheless, for those who are going to stay in their homes and need money on more than just a short-term basis, a reverse mortgage may very well be just what you're looking for.
Reverse Mortgage Information Conclusion
As I mentioned at the top of the page there are lots websites and TV ads offering you free reverse mortgage information. But you before you go very far into reverse annuity mortgages, I would suggest you at least check out a couple of good third party websites that can help you to dig deeper for reverse mortgage information.
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