If you’re reaching retirement age, or you’re already there you might be thinking about your future and how to plan your finances. One way forward that many people choose is to use the equity in their homes and either rent them out or sell them and downsize so they have a small amount of income to live on. However what many people don’t realise is that there is a third option and another way forward and that is to utilise something called a reverse mortgage. This is a guide to explain exactly what they are and how they work – and most importantly, you’ll be able to see if it is something you can do yourself.
What Is A Reverse Mortgage?
Normally, when you buy a home and take out a regular mortgage you’ll simply pay a monthly fee to a lender, and slowly start to build up equity in your home. Over a period of time, usually many years, what happens is that the “debt” you’ve accrued slowly goes down, you get more equity and then eventually when you’ve paid it off, the building is yours outright.
A reverse mortgage works a great deal differently and might at first seem odd to some. Instead of you paying a lender a monthly fee, the lender will pay you a fee. This is usually based on a percentage value of your house and will either come to you in one lump sum or in smaller repayments.
You get to keep the title deeds to your home, it’s yours to live in but whereas with a normal mortgage the debt decreases and equity increases, the reverse happens here. If you move, or decide to sell up or if the worst happens and you die, what will happen is that the lender will take control of the home and sell it, after any fees are paid the remaining money will come to you – or if you have died your next of kin or heirs.
The Federal Trade Commission states that if you outlive the reverse mortgage or if you receive more payments than it is worth, you will only be responsible for anything other than the original value of the home.
Here’s an example of how it can work:
There are two homeowners, let us call them Bill and Ted. Bill was born on January 1st 1940, whilst Ted, who lives next door to Bill, was born slightly later – on January 1st 1953. Both men have houses that are worth $300,000. Bill may be able to get a home equity loan of $174,900, but his neighbor, Ted will probably only be able to borrow $154,200 because he is much younger.
Reverse Mortgage Costs – Can They Work For You?
There are different fees and costs associated with reverse mortgages and they’re outlined below:
1.) Loan Origination Fee: If your home is worth less than $125,000 then you might be responsible for this type of fee which can cost up to $2500. Any lender can charge up to 2% of the home’s value, for the first $200,000 then 1% on any value higher than that. These fees, however, are capped at a maximum of $6000.
2.) Servicing fee: Depending on the sort of interest rate you have on your reverse mortgage you can be charged a fee of either $30 or $35. This type of fee is used to cover admin costs.
3.) Third Party Charges: These include costs for items like appraisals, title searches and insurance, inspections, credit checks, surveys, and any mortgage taxes you might incur.
4.) Mortgage Insurance Premium: This ensures that, should your reverse mortgage provider go out of business, you will still receive your loan advances. You’ll be charged your MIP on an annual basis and it usually works out to 1.25% of the mortgage worth.
To Qualify For A Reverse Mortgage You Must Be:
1.) 62 years old or over
2.) Own your own home
3.) Not have any debt
4.) Use the home you’ve paid the mortgage on as your main residence
5.) Be in a strong enough financial position to pay all your fees
The amount of money you’d receive will depend on the age of the youngest borrower (as couples can borrow and not just one person), what the state of interest rates are and the value of the home.
It’s really important to be aware that if you do qualify for one and decide to go ahead and take a reverse mortgage out, that in the long term it will leave you and your heirs/next of kin with fewer assets that they can rely on, but on the whole they are a safe bet for those people who are “house rich yet cash poor” and who need to be able to have a bigger income to live off during their retirement years.