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6/1/16 REVERSE MORTGAGE:
Definition: A reverse mortgage is a mortgage based on the equity in your property. You make no payments, but the payments accrue over time, and become part of your loan balance. In most reverse mortgages, even if the mortgage amount goes over the value of the property, you may still live in your property until you leave it by choice.
How to use a reverse mortgage to help you through retirement (and a few other ideas):
When we hear the term “reverse mortgage,” most savvy people used to think, “run the other way.” “Only get a reverse mortgage when there’s no other option.” And lots of other negative things.
However, under the new FHA guidelines, and with the new rules, a reverse mortgage can be a huge benefit to you as a person heading into retirement, or if you just want to have no payments.
Remember, you have to be at least 62, and have sufficient equity in your property to obtain one. There are also costs and fees associated with a reverse mortgage, so although it’s in some respects like a line of credit (which is much less expensive), it has its issues. However, in many cases, it’s the perfect solution . It’s like any other tool in a financial planning scenario. It’s just right in some cases, but is not the right choice in others.
Here are some ways you can use a reverse mortgage:
1. You can use a reverse mortgage to stay in your home and make no payments (except for taxes and insurance, which you must still maintain), for as long as you live in your home.
2. You can use a reverse mortgage to draw equity from your property as needed , without having to pay it back for as long as you live in your home. In this way it’s like a line of credit for which you make no payments.
3. You can use a reverse mortgage, with its relaxed credit requirements, to get a mortgage that’s lower in interest than the one you now have, and then pay it off over time , just like a regular mortgage (no, the lender doesn’t mind. He either gets his payments now or later, when the home is sold). In other words, you can use a reverse mortgage to buy another home (you have to put enough down to give yourself sufficient equity).
4. You can use a reverse mortgage as a financial planning tool . If you own a home with enough equity, you can get a reverse mortgage, and then draw it down only as needed, and pay it back if you like. So perhaps you don’t have any current financial needs. You can still get a reverse mortgage, and use the money available as you need later. All this, and you don’t have to make a payment on that loan nless you choose to do so. Payments are caught up when you sell or leave the home after your death.
5. You can use a reverse mortgage as an investment tool . Suppose you want to downsize, and you also want to take advantage of the benefits of owning investment property. You can sell your current home, then put enough down to get a reverse mortgage on your new home, get that mortgage, and have no payments to make on the home you live in, and then you can also use the remainder of your funds to buy an investment property that pays you rent and appreciates at the same time .
The most important first step, though, is to find someone who is competent and who has sufficient integrity to honestly explore the entire situation with you. We can help with that. We know people who do reverse mortgages, do them well, and will put you, not their own commissions, first.
What to know before you get a reverse mortgage:
1. There are costs and fees associated with reverse mortgages, and they are added to your loan balance , so they become part of the money that accrues interest.
2. While you are not required to make payments, each of those payments is “made for you,” and added to your loan balance, where it accrues interest, just as the money you originally borrowed does. So if you have a reverse mortgage of $200,000, and your payments are $1,000 per month (this is only an example), and you let the payments accrue, the first month your balance increases to $201,000, and your new payment is calculated on that balance, at the same interest rate. So next month, your payment will be slightly higher, and THAT payment gets added on, and so forth. However, even if the mortgage balance rises above the value of the property, the property can never be sold out from under you, as long as you live in the property.
3. You must continue to live in the property for as long as you have the reverse mortgage. You are allowed “time off” for hospitalization or other purposes, but you must maintain that as your principal residence for as long as you have that mortgage.
4. If your spouse doesn’t sign on the mortgage, he/she may still continue to live in the property once you die, under certain circumstances.
5. You must continue to pay the insurance and property taxes on your reverse mortgage, for as long as you own the property.
6. You may make payments on the reverse mortgage, so that it becomes like an amortizing loan, or you may pay it off, at any time.
7. You will have to undergo counseling from a counselor certified to do that work, so that you understand the benefits and issues with reverse mortgages in full. Be sure to ask the counselor any questions you have (write them down!) before you sign for the mortgage.
8. There is a “cooling off” period for reverse mortgages. In other words, you can decide, within a 3 day time period, that you don’t want the mortgage and cancel it.
Reverse mortgages are a good deal for a lot of people. They work well, and the do what they are designed to do. If you go into your reverse mortgage with your eyes open, you’ll probably be very pleased with the results. After all, who doesn’t want “no payments for life?”
Steve Bradley Independent Consultant