Six Things to Consider When Taking a Reverse Mortgage
Are you staying in your home forever? When taking out a reverse mortgage, it's usually best to decide if you're planning on staying in your current home forever or are you thinking of downsizing? If you decide to move or downsize for example, then you may want to wait and get a new reverse mortgage on your next home. You can easily take a reverse mortgage at the time you purchase a new home. But for obvious reasons, if you're thinking of moving in the near future, you may want to wait and then take a reverse mortgage when you purchase the "forever home".
How much can you borrower? The maximum loan that you can take out on your home is based on the amount of equity, your age (the older you are the more you can borrow), and the current rate of interest. You can choose between either a variable rate or fixed rate. One example is if you owe about $100,000 on your mortgage and the value of your home is about $375,000 then you would be able to take about $$190,000 cash out.
What are the costs? Mortgage Insurance is 2% of the appraised value of the home or the Federal Loan Limit, whichever is lower. Other costs are closing costs such as escrow, title, appraisal and notary which are about the same as any other traditional mortgage. An origination fee which can vary and can cost between $2,000 and $6,000. Shopping around can be helpful, just like with a traditional loan. Work with a local lender or mortgage broker is very helpful since they will ensure you get the best rate and costs.
What are your plans for the proceeds or cash out you receive? Part of the new reverse mortgage will pay off your current loan. Then you will have a lump sum or use an equity line as needed. You can use the cash out for any reason such as to pay for medical expenses, to remodel you home for retrofits for aging like a new walk in shower or possible a ramp where needed for wheelchair access. But funds can also be used for traveling, gifting to children, paying for your grand childs' college. buying an annuity, The list can go on but the point is that it's your money so you can use it for whatever you may see fit.
Make sure you stay current on other expenses. While you don't pay any principle or interest during the time you have a reverse mortgage, you will need to maintain your annual property tax bill, insurance and any HOA or home owners monthly expenses. You can set up the HOA as an automatic deduction as well as the monthly insurance. However, the taxes need to be paid either semi annually or annually or you can budget the monthly amount in your savings and them pay them either once or twice per year.
How is a reverse mortgage paid off? Once you leave your home for 12 months or longer, or you pass away, however as long as your souse is still alive he/she can remain in your home. Once both have passed or moved out the lender is paid back the principle plus interest due at that time. The house can be sold and the loan is repaid that way and any extra funds can be passed to the heirs. If for some reason the home is sold but the loan amount is more than what the home sold for, the mortgage insurance pays any overage so no family or heirs need to pay a dime.