Reverse Mortgages

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A reverse mortgage is a form of a loan that enables home owners to obtain cash by securing the loan against their home’s equity. The home owner may access the home’s equity in a lump sum payment or by monthly payments. The loan operates like a revolving line of credit, however there is no monthly payment required. If the borrower chooses to make early payments, this will increase the available borrowing amount.

If the value of the borrower’s property has increased in value, it is possible to obtain an additional reverse mortgage.

Reverse mortgages are also available for home buyers. The only difference is that the loan will only be in the amount of the debt free portion of the house by which the mortgage has been paid down.

Eligibility

In the United States, a borrower must be 62 years of age or older in order to qualify for a reverse mortgage. The property must also be declared as the borrower’s principal residence. Although there are no specific income requirements, any unpaid portion of the mortgage must be able to be paid off by the proceeds of the reverse mortgage. This means that the unpaid balance cannot be excessive.

Individuals with bad credit may also be eligible since there are no payments required on a reverse mortgage. The only exception is if an individual has declared bankruptcy. If this is the case, a court approval may be required.

Before applying for a reverse mortgage, individuals must take a counseling course. The costs associated with the course are designed to be affordable, or in some cases free. The purpose of the course is to ensure that the borrower fully understands the concept of a reverse mortgage, and that they are familiar with some of the risks that might be associated with it.

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Costs Involved

The costs of a reverse mortgage will vary depending on the type of loan acquired. The most common type of reverse mortgage is the Home Equity Conversion Mortgage which is insured by the Federal Housing Administration. Some of the costs associated with the HECM loan include:

  • A premium calculated at 2% of the appraised value
  • An origination fee. For homes valued under $125,000, this fee will be $2500. However, for homes appraised at greater than $125,000, the fee will be calculated as 2% of the first $200,000. If the value is appraised at greater than $200,000, borrowers must add 1% of that amount. The fee is capped at $6000.
  • Title insurance and legal fees which will be different for every jurisdiction
  • Other variable costs include a real estate appraisal

In addition to the above costs, there is a monthly service charge which ranges from $25 to $35. The interest rate charged on a reverse mortgage will also vary, however it will usually be below any other interest rate prevailing in the market since the loan is backed by the home’s equity.

Criticisms of Reverse Mortgages

Reverse mortgages are often criticized due to the high costs of setting up the loan. They are often significantly more expensive to enter into than other forms of loans in the United States. The costs can even be $3000 higher than that of a traditional loan.

Although interest rates will be lower than most types of loans, they will still be higher than on a conventional mortgage. In addition to these costs, the interest will compound over the life of the loan. This means that the interest payments are calculated on not only the principal amount but also on previously assessed interest. This means that if the borrower is not careful, the loan can quickly become unmanageable.

Another criticism that is often brought up is the complexity of the loan. If a borrower does not fully understand all the terms and conditions, it will be easy for them to become targets of unfair lending practices.