By Mary Lindsleystltoday.com
Reverse mortgages have been getting a lot of attention lately, perhaps because they seem like a great deal: You convert some of the equity in your home into cash, and you don’t have to pay it back until you sell the home.
This type of loan can be beneficial, but first, do a lot of research, look at all of your options and know exactly what it will cost you.
Reverse mortgages can provide you with extra monthly income, or they can help cover large expenses like medical bills. Reverse mortgages are available only to people who are 62 or older, and only to people who have all of most of their mortgage paid off.
Most reverse mortgages are what are known as Home Equity Conversion Mortgages, backed by the U.S. Department of Housing and Urban Development.
“We definitely encourage someone to seek out the federally insured reverse mortgages, because they’re called nonrecourse loans,” said Bill Nass, vice president of Gershman Mortgage. In other words, if a couple takes out a reverse mortgage that, with principal and interest, grows to $150,000, but they receive only $125,000 when they eventually decide to sell their home, the couple is not on the hook for the extra $25,000. This would also be the case if the couple’s heirs are selling the home.
“The federal guarantee is that they only pay back what the home appraises for,” Nass said. “So they can’t end up upside-down on the mortgage.”
There are several ways the loan can be paid out. Borrowers can choose a lump-sum disbursement, in which they receive a check for the full amount of the loan. They can receive a set amount of money on a monthly basis. A third option is to treat the loan as a line of credit.
Nass said one of the biggest misconceptions about reverse mortgages is that they require borrowers to sign their home over to the lender. In fact, borrowers still retain the title to their home.
But remember, if you have a reverse mortgage, you will be required to keep up with property taxes and insurance payments, and you will be required to keep the home in good condition. The lender can foreclose on your home if you fail to adhere to these conditions.
Another condition of a reverse mortgage is that your home must be your primary residence. If you’re out of your home more than a year, the reverse mortgage will come due, so it isn’t a good option unless you plan to stay in your home for a long time.
There’s some of other factors you should consider:
• Interest will be charged on the loan on a monthly basis, so the total amount you owe is going to grow over time.
• There will be additional costs associated with the loan, including closing costs and servicing fees.
• Unless the value of your home increases, there likely will be less equity for your heirs to inherit.
• Interest charges and other fees may vary widely from lender to lender. Do some comparison shopping before you settle on one.
Before you can go through with a reverse mortgage, you will be required to first undergo housing counseling with an independent, government-approved housing agency.
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