Today's financial shop is one of the most difficult markets to navigate since the depression. Many questions about where to turn for advice and how to find the best financial products without sacrificing safety abound. Reverse mortgages hold promise as a safe and collect tool, but many seniors have questions about reverse mortgages and the myths surrounding them. Questions include: How do they work? What do you give up if anything? And, how does the holding of home ownership work?
To start, let's cover the basics and history of a reverse mortgage. The term came from early products in the 1980's where the lender made payments to the borrower rather than the borrower making payments to the lender. As a effect the stock was named the "reverse mortgage". These reverse mortgages (Rm) often had valuable downsides. Once the borrowers passed away the home became the property of the bank who lent the money, and at times terms applied where the borrower could be displaced from the home if they lived too long. Interest rates were typically adjustable with no fixed rate options available. Conclusion costs were often very high as well. In the 1990's Fha, looking great potential for the product, got complicated and new rules were implemented allowing the borrower to pass on the home equity to their heirs, a certify to never be displaced from the home regardless of how long they lived, safety from home value volatility and much more. As a result, today's reverse mortgages are a great option with very few drawbacks.
So how does the Rm work? A reverse mortgage is similar to a approved mortgage in that it is a loan that is secured by real property, namely the home. The big contrast is that there are no mortgage payment requirements on the mortgage. How is this accomplished? The Rm requires that you have equity in your home and that you are at least 62 years old. As a effect a calculation is made to determine the estimate of equity that can be lent by looking at the age of the borrower, the interest rate expensed and the location of the home. This tells Fha and the lender how much they can safely lend without ever collecting a mortgage payment. As a effect the lender can lend with minimal risk, but must wait to make their interest until the homeowner whether chooses to move or passes away. Foreclosing is rarely an issue- only in cases where the homeowner does not effect the terms of the loan such as not living in the home, not holding the condition of the home to inexpensive standards or not paying the property taxes and homeowners insurance. This makes a loan that is very keen to the lender who plainly wants to earn interest on a low risk loan.
So where does Fha come into play? Fha had an impact on the reverse mortgage industry when it started insuring the lenders against losses in transfer for clear benefits to the homeowner. This helped sacrifice interest rates and eliminated most of the big drawbacks of doing a reverse mortgage. If the lender issues an Fha reverse mortgage they are insured against losses should the balance of the mortgage be higher than the value of the home when the homeowner's pass away. Further, the same Fha insurance leaves the borrower the capability to leave the home equity to their heirs- and in most cases there is equity left for the heirs. Today's Fha insured reverse mortgages are referred to as Hecm loans, or home equity conversion mortgage.
The benefits of today's reverse mortgages contain the capability to live in the home payment free, to receive money from the Rm to do home improvements, pay off debts or other mortgages, get safety from housing volatility, and get funds that are not assessable (full article). Money received from a Rm is not taxed because it is not income, it is in fact loan proceeds just as getting cash from a mortgage refinance. The money does not work on Medicare or communal safety wage as a result, but can have an impact on Medicaid for those receiving that assistance. Current Rm have many option types available, together with fixed rate options, equity lines where you use money only as needed much like using a prestige card- but without any payment requirements, and options for having monthly payments sent to you, or having a lump sum of cash given to you at the loan settlement.
Because of the issues from reverse mortgages of the past, many myths about reverse mortgages abound, and are often spread by financial consultants, radio personalities, close friends and relatives and even mortgage professionals who are not experts on reverse mortgages. We have included a full section on reverse mortgage myths to help elucidate these myths and what the real facts are.
The myths include, but are not little to the following beliefs:
- The bank will own the home when I pass away or move.
- My kids will not inherit the home equity.
- I cannot buy a home with a reverse mortgage.
- Reverse mortgages offer only adjustable rates
- My kids will have to pay the lender if the mortgage balance is higher than the home value when I pass away.
- I cannot do a reverse mortgage if I currently have a mortgage on my home.
- Closing costs are highly high.
- I will be forced to move from my home if I live too long.
- I won't qualify because of my prestige or wage situation.
Have you heard any of these myths yourself? It is likely you have heard at least one of these false statements before. There are many benefits to reverse mortgages, as well as a few drawbacks. We encourage you to get faultless data from a reverse mortgage professional prior to making a decision on getting a reverse mortgage. You can get a free, no obligation quote and get all the facts so you can make your option with confidence.
Reverse Mortgage 101