Tuesday, April 14, 2015

Reverse Your Mortgage

If you own your own home, you can turn it into a pension -- giving you a tax-free monthly payout or a lump sum -- with no need to repay until you die or sell your home. It's not too good to be true. It's called a reverse mortgage, and it's your reward for faithfully paying down your mortgage over the years.



Now you can access that equity even if you still have a small balance on your mortgage. You can use the cash for any purpose -- living expenses, medical expenses or even a vacation.



There is no repayment until you die or sell the home -- and even then, the lender can't come after you for anything more than the proceeds of the sale of the house. You --or your heirs -- can never owe more than the home is worth.



Here's more of what you should know about reverse mortgages:



1. How much can I borrow? The amount of equity you can access depends on your age (only homeowners age 62 or older are eligible), the current value of your home and the current level of interest rates. The maximum amount of home equity that can be accessed in a federally insured Home Equity Conversion Mortgage (HECM) is $625,000. But the amount you can get in a lump sum is far less, as the lender reserves some equity to protect itself against the cost over your projected lifetime.



To get an idea of how much you could get in a lump sum or monthly check, go to ReverseMortgage.org and use the calculator. You can also search for a lender at the site, and learn more details about this type of loan.



2. What's the interest rate? The interest rate will be fixed at the time you take out the reverse mortgage, or you can take a floating rate, which gives you a slightly higher payout because the lender doesn't bear so much interest rate risk. But you won't have to actually pay the interest; instead it will accrue monthly to the balance owed when the house is sold.



3. What other fees and costs are there? There are other significant fees that add to the balance of your home equity borrowing, which is why you should only take out a reverse mortgage if you are planning to stay in your home for a long time.



First there is an up-front federal mortgage insurance premium (MIP), designed to protect the lender against your longevity and protect you against owing more than the home is worth, ensuring that you will continue to receive that monthly check, no matter what happens to the lender.



To obtain a reverse mortgage, you will pay 0.5 percent of the funds withdrawn in the first year. (If, how however, you take more than 60 percent of the equity in a lump sum, the upfront MIP will be 2.5 percent.) And there will be an additional annual MIP premium equal to 1.25 percent of the outstanding loan balance.



Plus, there will be a servicing fee every month. You don't pay these fees outright; instead they are rolled into the balance you owe, and upon which you pay interest. There are also closing costs, such as appraisal fees and title search, which can add to the cost of setting up a reverse mortgage.

The government requires all reverse mortgage borrowers to get independent counseling so they understand the costs and that their heirs will not receive the asset as part of their inheritance.



4. What other costs will I have? As long as you live in the home, you are responsible for property taxes and insurance, although the lender will escrow those for you. And you are responsible for keeping the property in good repair and paying any assessments if you are living in a condo. The lender will do an assessment to make sure your other income can cover those expected expenses.



5. What happens when I die or sell or permanently move into a nursing home? That's when all the accrued balance comes due, if you don't have a co-borrower. So the house will be sold to repay the loan. But, again, you can never owe more than your home is worth!



Do I believe in reverse mortgages? Actions speak louder than words. Nearly 20 years ago, I helped my father take out a reverse mortgage. Over the years, the outstanding mortgage balance, including interest, has grown to far more than his Florida condo is worth. Now, at age 93, he still enjoys living there. His reverse mortgage worked. And that's The Savage Truth!

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