Reverse Mortgages For Dummies
You've probably heard a lot about reverse mortgages, as they are a popular, safe, simple way to supplement seniors' retirement income. Before you get started, you need to understand the benefits and disadvantages of getting a reverse mortgage. If you decide a reverse mortgage may be the right answer for you, follow some planning tips to help make the loan process easier.
Understand Reverse Mortgages
People tend to shy away from the very idea of reverse mortgages, in part because of their former bad rap, and in part because of all the scary terminology. When someone starts spouting off about how you can "utilize the equity in your home on deferred payments with a conversion mortgage," chances are pretty good you're going to tune it out.
Reverse mortgages pay you to continue living in your home. You can think of your home as the Bank of You: You're borrowing money that you would have earned had you sold your house. You can then use the money for whatever you want. Anything your heart desires (and your wallet can handle) is yours for the taking, whether it's a vacation in Switzerland, moving your master bedroom to the first floor, or sending yourself to college!
The concept is kind of abstract if you've been paying a lender for the past 30 years or so, and it may be difficult to grasp at first. Take a look at the quick reference points below:
You're a homeowner who owes little or nothing on your home. You decide you need more money to live the lifestyle you want, but your biggest asset is your home and you certainly don't want to sell it to get the money you need.
A reverse mortgage lender figures out how much it can lend you based on your home value, your age, and interest rates, and loans you some percentage of the money you would have gotten if you'd decided to sell your home.
You still own your home and continue to live in it, but now you're getting payments from the lender, so your cash flow problem is solved.
You pay the loan back (with interest) only when you don't live in the house full time anymore, usually due to moving out or death.
You never owe more than your home is worth, no matter how much you've accumulated in debt.
You keep any leftover equity after the sale of the house; if you owe the lender $67,000 and your home sells for $200,000, you put the difference in your pocket and walk away smiling.
A reverse mortgage is sometimes called a deferred payment loan, and for a very good reason. Instead of paying off the home loan as you borrow money, the payments are put off (deferred). This is why reverse mortgages can be such a good choice for seniors; when you're on a fixed income or living off of your savings, it can help to have some extra cash in hand to supplement.
Because payment is deferred, you are spending the equity in your home, rather than earning it (as you would with a traditional forward mortgage). Since equity is an intangible value, you never feel the effects of the equity going down, but you sure feel the money flowing steadily into your checking account.
Know What a Reverse Mortgage Isn't
A reverse mortgage can be a lot of things: a way to make ends meet, a nice chunk of change for a rainy day, a fabulous dream vacation, or a remodeled kitchen. But there's one thing it's definitely not — free money. There’s no free lunch here.
While reverse mortgages allow homeowners (who are at least 62 years old) to borrow against their home's equity and still maintain ownership of the home, your loan will need to be paid back, just like any other loan (whether it's due when you move or upon your death).
There are fees involved that can include payments to the originator, the appraiser, postage fees, recording fees . . . the list goes on and on. (These are the same sort of fees you paid for the mortgage that bought you the home you live in now.) You also have to pay interest on your loan, which is generally right around the interest rates on traditional mortgages.
You only pay interest on what you borrow, so any money that you don't use from your pool of reverse mortgage funds isn't charged.
A reverse mortgage is also not a direct value-to-dollar loan. You are loaned a percentage of your home value, based on age, interest rates, and area. Don't expect the full value of your home, or you'll be very disappointed. Before you make plans to spend money you don't yet have, go online and click on the reverse mortgage calculator. This very cool tool from the National Reverse Mortgage Lenders Association gives you an estimate of what you may be able to borrow.
Lastly, a reverse mortgage is not an all-encompassing loan that's right for everyone. Just because you qualify by being a 62-year-old homeowner doesn't mean you're an ideal candidate. To find out whether or not a reverse mortgage is right for you, here are a few of the basic questions you can ask yourself:
Are you at least 62 and own your own home?
Do you plan to be in your home for at least 5 years?
If you're getting the loan to purchase or pay off something specific, have you looked into other options for financing those expenses?
Are you comfortable with the terms of the loan?
The more of these questions you can answer "yes" to, the more ready you are for a reverse mortgage.
Quick Reverse Mortgage Planning Tips
Before you make up your mind about pursuing a reverse mortgage, take a minute to make sure you're starting out on the right foot. Having a strong foundation will make your loan process much easier, both for you and for the professionals involved.
For the best planning, follow these tips:
Know all you can about reverse mortgages before you walk into your counselor's or originator's office. It pays to be well-informed, and you'll be more relaxed when you know what to expect.
Make sure you qualify for the loan (you're at least 62 and own your home). When in doubt, just go for it. It never hurts to go talk to the counselor, and if you don't qualify the counselor may know of another program that can solve your financial situation.
Get to know the loan options. Read about each one, and consider which works best for you based on your home value, county, and age. Get your family's input as well, but always do what feels right to you. After all, it's your loan.
Plan your repayment carefully. Don't leave this important step to the last minute or unresolved for your heirs. Lay out a plan and be sure to record it in your will. Talk to your family about their future responsibilities.
When you go to your counselor meeting, take along a friend or family member who can help you take notes, ask additional questions, and weigh in afterward. Sometimes it helps to have someone there to bounce options off of, or just hold your hand while your counselor explains your choices.
Get your money's worth out of your originator. Ask as many questions as you can think of, call if anything comes up before or after the loan closes, and feel free to ask for help along the way. You're paying for their services — make it count.
Before your appraiser arrives, spruce up your house (within reason). Give everything a good scrubbing and fix the little things that are broken. Try to look at your home from an appraiser's point of view and be realistic in your expectations of your home's value.
If you're an adult child of someone who's thinking of getting a reverse mortgage, find out all you can about the loan, and be a part of the process if your parent allows it.
If you're a baby boomer, start planning now! Pay off as much of your current mortgage as you can afford, and get your home ready to be a retirement paradise.
Most importantly, if you ever have questions or don't feel comfortable with some part of the loan, stop! Ask questions and get them resolved before you move on.