If you are a Senior and own your home there is a relatively new home loan instrument that you may benefit from called a reverse mortgage.
Now when entering into any contract that can effect the largest investment most of us have our homes you want to do so with full knowledge of what you are getting yourself and your family into. For this reason we are requiring you to seek out and get advice from a professional lender and possibly your lawyer and do not rely on what we have to say here. This is a very important step and you need all the help you can get. Also you should talk with as many lenders as you can before you make the agreement. They get paid to inform you but no matter who the lender you may find that you talk with a misinformed employee that could give you bad advice so talk to 10 or more and you can probably bet you will get a good idea about how this works. We will cover the basics to get you started.
What is a Reverse Mortgage?
If you own your own home then you most likely had a first mortgage that covered the primary purchase of your home but like many families you may have also received money on a second mortgage or a home equity loan.
When you applied for your home equity loan the lender inspected your home and placed a value on it. Then they looked at your primary loan and calculated if there was any increase in the value of the home vs what you owed. If there was more value the lender would offer you a loan based on that additional value.
Reverse Mortgages work in a similar fashion for valuing the money the lender will give you. They take a look at the actual value of the home which you must own and then they decide what amount they will loan you.
The difference between a home equity loan and a reverse mortgage is that the lender does not require immediate repayment of the loan.
They do require that the home be your primary residence.
When Do I Repay The Loan?
This is the Tricky Part…. You will need to begin repayment of the loan when the home is no longer your primary residence.
You will need to examine your documents closely and make sure that you fully understand the circumstances that could trigger the repayment of your loan. And you also want to know exactly what rate and amounts you will have to pay.
If a lender requires a balloon payment at the beginning of loan repayment a temporary stay with relatives or in a nursing facility could mean at the worst time they take your home.
What are the Requirements?
Each lender will have different requirements but the FHA has a program that most people can take advantage of even if they did not buy the home with a FHA loan.
Under the FHA guides the following minimum requirements are as follows:
- You Must be a homeowner 62 years of age or older.
- You Must own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan.
- You must live in the home.
- The home must be a single residence or a 1 – 4 unit home that you own.
- You Must continue to pay for home insurance.
- You Must continue to pay for utilities.
These are the very minimum standards and others will apply in your contract read it carefully.
How do I receive my payments?
Under the FHA program you have five options:
- Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
- Term – equal monthly payments for a fixed period of months selected.
- Line of Credit – unscheduled payments or installments, at times and in amounts of your choosing until the line of credit is exhausted.
- Modified Tenure – combination of line of credit with monthly payments for as long as you remain in the home.
- Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.
When I die or leave the home do I lose everything?
This is a very important part of your loan to understand not only to protect your children if you plan on leaving something for them but for yourself if you find you must move into assisted care or other family members.
Read your documents closely and depending on the way you received your payments there still may be equity in your home after you are no longer living in it.
You or your heirs will sell the home and then repay your loan from the proceeds based on the amount you received.
The more money that you received from your loan the more money you will owe. HOWEVER YOU MUST review all documents and make sure that you are not charged unreasonable fees.
Anyone who has tried to cancel a cellphone contract before the contract was up for renewal knows that even if you cancel just days before the renewal date you can be hit for charges that are extreme.
The same happens if you try to break a saving CD at your bank. If you cash in a standard CD at anytime other then the 7 to 10 day grace period you are likely to lose half or more of all the interest you earned in the past months or years…
Final Note
Some very unfair things can and do happen in contracts and if you agree you could find that you outlive payments from your loan and you could lose your house if you have any extended illnesses or other problems.
You may also find that this type of loan voids your ability to move to long term assisted care.
You should not consider this type of loan without fully understanding all of the problems associated with it and all of the outside factors.
If you are having problems paying your bills whether they be credit or medical then you should not jump into this type of loan believing all your worries will be ended.
And NEVER allow anyone to force you into this type of loan.
Personal bankruptcy allows the filer to keep their primary residence that means if you have a $5,000 credit card or auto loan bill you cant pay you should NEVER put your home at risk… at the very least when you are older you may find that having a younger relative maybe a grandson come live with you and give you $500 a month rent and added sense of security incase something happens is a better thing to do.
You can receive additional free information about reverse mortgages in general by contacting the National Council on Aging at (800) 510-0301