Everything You Want to Know About Reverse Mortgages
There has been a lot of talk lately about a different kind of mortgage called a reverse mortgage. There are a lot of opinions about the pros and cons associated with a reverse mortgage. It has caused quite a bit of confusion for many people. Reverse mortgages are marketed towards senior citizens or those who have paid of their mortgages. That group of people are both susceptible to scams and also unwilling to make changes. Continue reading to find out more information about a reverse mortgage. I will also give you some general information about all types of mortgages, so you can have a full wealth of knowledge.
What Is A Reverse Mortgage?
A reverse mortgage is basically a loan against the value of your house. You must be 62 years of age or older to qualify for a reverse mortgage. You must also have a large amount of equity in your house, or your house must be paid in full. When you take out a reverse mortgage, you can get one lump sum, a regular payment each month, or a line of credit. With this loan, you do not have to make any loan payments. You pay back the loan upon selling the house, moving out of it, or death.
Reverse mortgages are federally regulated and the lender cannot loan more money than the value of the house. If the loan amount exceeds the value of the house, you or your estate is not responsible for the difference. This can happen when the value of the house drops or if you, as the borrower, live longer than expected. This type of loan gives senior citizens access to money that is tied up in the value of their home when they need it instead of it going to their estate upon death.
Are Reverse Mortgages Scams?
In general, a reverse mortgage is not a scam. However, they are geared toward a population of people that tend to be vulnerable. Senior citizens often suffer from the inability to make sound decisions and often look for ways to solve their financial burdens. They do not want to be a burden to their families and feel like they should have something to leave behind besides debt. A reverse mortgage can be a fast and easy way to make a large sum of money so it is an area that is subject to criminals.
Contractors and vendors have been known to prey on seniors to persuade them to obtain a reverse mortgage to pay for improvements to their homes, which may need be needed. The contractor may not perform the work, or do a shoddy job and just take the money from the senior. Unfortunately, many people have taken advantage of senior citizens for a long time. Even family members have been known to take advantage of the older family members. They make claims that they are not able to handle their money and force them to get reverse mortgage just to steal the money. The reverse mortgage itself is not a scam, however, people use reverse mortgages to scam people.
What Are The Advantages To A Reverse Mortgage?
There are many reasons why a reverse mortgage might be a good idea for you. A reverse mortgage is similar to a line of credit or a home equity loan. A reverse mortgage gives you a lump sum that you can access when you need it, not later when you decide to sell your home. One of the major advantages of a reverse mortgage is you do not need any form of income. Your credit score does not matter when you want to obtain this type of mortgage. Another huge advantage is you do not have to make any loan payments as long as you live in the home. Any other mortgage or loan has monthly payments associated with it.
For most people over the age of 62, their home is their largest asset, but they cannot access the cash in it. You can tap into the equity in your home without having to sell it or make any payments. This type of mortgage is the only way you can do essentially take out a loan but not make any type of payment. Seniors often find it hard to pay basic expenses. Some of the many reasons for this is the increased cost of health care and people living longer. Often seniors have basic medical coverage and the cost of prescriptions is through the roof. This gives them a way to make those payments easier. When someone takes out a reverse mortgage, that person is still responsible for paying the property taxes, insurance and continuing to maintain the house.
What Are The Disadvantages To A Reverse Mortgage?
When considering a reverse mortgage, you should know that there are some disadvantages, too. You should be aware of them so you can make an educated decision when determining if a reverse mortgage is right for you. One of the key pieces of which you should be aware is for you to qualify for a reverse mortgage you must be able to state that you will not have to move into assisted living within one year of the loan.
The reality of a reverse mortgage is that you tap into the equity in your home and take a large chunk of it. This means that when you are ready to sell your home, you will not make as much, or any money on the house. Another possibility is that you pass away while living in the home and your heirs do not get the full value of the house. However, that may not matter to you for many reasons. This is a determination that you need to make and determine if this is the best thing for you right now.
Typically, when you elect for a reverse mortgage, there are several plans from which you can pick. You can pick a lump sum or line of credit and those amounts of money may not last you for the rest of your life, especially if you live longer than you expect. Another option is you can receive monthly payments but the key is to make sure the payments would give you enough money per month for the rest of your life.
What Are Other Types Of Mortgages?
There are many different types of mortgages on the market. A reverse mortgage is completely different from most typical mortgages. In this case, you are a certain age and you already own your home, or have a large amount of equity in it. I want to touch on all the other mortgages that are for buying or refinancing a home. It is important to understand these distinctions when you shop mortgage lenders. This helps guide you to making the right decisions when you are looking for a mortgage.
Fixed Rate Mortgage
The most common and safest mortgage is a fixed rate one. The largest benefit of this type of mortgage is that the payment amount remains the same each month. These types of loans are offered in ranges from 10 to 40 years, with the most common being 15 and 30 year repayment lengths. Lenders want you to have a down payment that is 20 percent of the price of the house. If you cannot have a down payment of 20 percent, the lender most likely requires you to have private mortgage insurance (PMI). This insurance protects the lender if you do not pay your mortgage. You usually need a higher credit score to be able to obtain a traditional mortgage and you need a fair amount of documentation.
Adjustable Rate Mortgage
Another type of mortgage is an Adjustable Rate Mortgage (ARM). This type of mortgage has a level of risk that you have to accept before you obtain one. Just as the name states, the interest rate is adjustable, so it does not remain the same. One of the most common types of an ARM is a 5/1 type of loan. This means that the rate stays the same for 5 years and then changes every year for the life of the mortgage.
The interest rate for the first 5 years tends to be lower, which can translate to a huge cost savings for you. However, once the rate increases, it may get so high, you cannot pay the mortgage. Often homeowners sell their homes or refinance before the end of the 5 year period to a more traditional loan. This type of loan can get you in your house and you can work to improve your credit or build equity in the house so you can qualify for better rates before the end of 5 years.
Interest Only Mortgage
Another type of mortgage is an interest only mortgage. This type of mortgage allows you to pay only the interest of the loan for the first 5 to 10 years. After that time period, you begin to pay off the mortgage as if it was a conventional mortgage. This type of mortgage can decrease your monthly payments, however, it can increase the time it takes you to pay off your mortgage. It also decreases how much equity you earn in the house.
How Do I Go About Getting A Mortgage?
No matter if you are interested in a reverse mortgage, or some other type of mortgage, you should do some research. It is important that you know how to shop for a mortgage. It is also important that you understand the differences between the mortgage types, so you can ensure that you are choosing the best option for you. You should have an understanding of how happens when you apply for a mortgage, so you know what to expect and be prepared.
- Check your credit and if you need to improve it, start working on it.
- Get prequalified. This way you’ll show to any seller that you are a serious buyer. And you can check how much money you’re able to get. With this information, you basically know what your budget is and which price range can you look at.
- Choose a mortgage from all the options that you found. Make sure you choose the best mortgage for your situation. The best mortgage is that which you can actually afford.
- Find the right lender for you. Not only is the mortgage important, but so is a lender that is willing to work with your credit and down payment.
- Gather all documents. Some of the documents you’ll need are where you worked for the last two years, pay stubs, tax returns in the past two years, two years worth of W2s, any proof of pension. You should also get documents which prove dividend earnings, bank statements, and any other debts that you have.
- Another step is to check out a mortgage calculator and determine the amount you can afford to repay.
What Is A Mortgage Broker?
Whether you are interested in a reverse mortgage or a traditional mortgage, there are mortgage brokers available to help you. You do not need to have a mortgage broker to get a mortgage, but you may find one helpful. A mortgage broker finds the right mortgage for you and your needs, but there are fees. A mortgage broker does not work for a bank. They get paid by the fees that they charge you. They must have a license to operate.
A mortgage broker usually has various loans from different lenders to offer you a wide variety of options. A mortgage broker can work with lenders to secure a loan for you. For example, if you only have 8 percent to put down for a house, the broker can find lenders that accept those terms. A broker can do all the negotiating for you. This may be especially helpful if you do not have the best credit. A broker may be able to find some of the best homebuyer grants and programs for you so that you do not have to do any of that work.
Mortgage Broker Fees
If you are considering a broker, you should be aware of the fees that you may have to pay. The broker may use lender based compensation fees which means that the lender pays the fees of the broker and then adds those fees on to your mortgage. If the mortgage broker chooses borrower based compensation, that means you pay the broker fees at closing. Every broker charges a different fee amount and they may call them by different names.
Here are some of the common fee names and types that you hear:
- Loan origination fees – the lender charges origination fees which are a percentage of your mortgage, and sometimes the broker can add their fees to this. If this happen, make sure you ask for a breakdown of these fees so you can see how much exactly has the broker charged.
- Yield spread premium – this is the amount the broker gets from the lender because they got you to get a mortgage with higher interest. Make sure you have a competitive interest rate if this is the case.
- Upfront fees – when you get a jumbo loan, you also have these fees to pay and they are usually flat rate fees.
- Administrative fees – this is the fee that the broker adds tot he standard lender fee. You should ask the broker to waive it if you see this fee in the breakdown.
Important Mortgage Terminology
When you are determining where to shop for a mortgage, it is important that you understand some key terms. When you fully understand these terms, it makes it easier for you to make a sound decision about the right mortgage for you. Even if you are interested in a reverse mortgage, understanding the terms are a key part to obtaining the proper mortgage.
Some terms of which you should be aware are:
Amortization – this is when your mortgage is broken down into scheduled payments of principal plus interest. Those payments need to be higher than the interest or the loan balance increases.
Amortized Loan – this is any type of loan that has been paid of in equal payments.
Closing – this is when you meet an attorney to sign the final documents for the mortgage and buying a house. This is when the attorney takes your funds from your lender, which includes any fees or commissions. The attorney pays the seller for the house. All of this paperwork is recorded at the local courthouse.
Closing costs – this covers all the costs including any administrative costs. It may also include appraisal and credit report fees, attorney fees, recording fees, survey fees, termite inspections and title insurance.
What Factors Impact My Mortgage Payment?
There are two major factors that impact your mortgage payment, except when it comes to a reverse mortgage. Interest and down payment are two of the major contributors to your mortgage payment. A down payment is the money you put down upfront to buy a house. This is the amount of the purchase price that you pay out of your own pocket. This money is not factored into the loan amount that you ask to borrow. The higher your down payment amount, the less money you need to borrow which means the less money you owe. This also means the lower your monthly mortgage payments is going to be.
Obviously, the higher your down payment, the lower the amount you must borrow. You may qualify for lower interest rates if you put down a larger amount of money. When you put down a larger amount of money, you are reducing the amount of risk a lender has because you own more of the house. When the lender has a lower risk, you see that reflected in a lower interest rate.
Interest is what the lender charges you for allowing you to borrow money. The amount of interest you pay is directly related to your credit score and the amount of your down payment. If you have a bad credit score of less than 579, it adds about 2 percent on to the lowest interest rate. And if you have poor credit, you see an interest rate that is about 1 percent higher than the lowest rate. But if you have average credit, you should not see much increase in the interest rate. If you have excellent credit, the lender offers you the best interest rate they can.
Does My Credit Make A Difference?
The good news about a reverse mortgage is your credit does not make one bit of difference. However, if you would like another type of mortgage, your credit absolutely matters. A lender looks at your FICO score and the credit score. The difference with a mortgage is the lender pulls a credit report from each of the three credit bureaus. Typically all three scores are a little different. The lender uses the middle range score. If your credit scores are 600, 620, and 650, the lender uses 620.
What If I Have Bad Credit?
If you have bad credit, it will not impact a reverse mortgage. However, if you think you have bad credit, you should find out for sure before you attempt to get any other type of mortgage. A good rule of thumb is to look at your credit score about 4 or 5 months before you apply so you have a good idea of your credit score. You can use one of the many sites that gives you access to your credit report. A 740 or above is a great credit score. Anything between 680 to 739 is average. A score between 620 to 679 is fair. Anything between 580 to 619 is poor and a score below 579 is bad.
If there is an error on your credit report, fix it immediately. This can improve your credit score. You should work to decrease the amount of debt you have. You should also improve your payment history. One of the top reasons for a low credit score is late or missed payments. You should begin making all of your payments on time and in their full amount. It takes consistent work, but you can begin to improve your credit score.
It can be difficult for you to improve your credit score without a decent understanding of credit and credit terms.
FICO score – this is the three digit number that informs lenders of your level or risk and credit worthiness. The higher your number then the less risk you are to a lender.
Credit report – this is the report that contains your credit score. It also contains your entire credit history. And it shows your payment history, along with all your debts and income. It shows if you have filed for bankruptcy and any other credit problems you have had.
Debt to income ratio – this is the amount of debt you have compared to your income. This number is a percentage and lenders prefer your debt to income ratio is less than 30 percent.
Affordability – this is a term used with mortgages. This is the amount that a lender feels you are capable of repaying when it comes to purchasing a home. This is typically the amount for which you can obtain a mortgage. Be careful with this number. Do not let the bank tell you what you can afford. Use a mortgage calculator and determine for yourself just how much you can afford to pay for a house.
This article contains a lot of information about a reverse mortgage and other general mortgages. As with any type of loan, considering a reverse mortgage is a big deal and not something you should take lightly. You should weigh all of your options to make sure a reverse mortgage is the best answer for you. Keep in mind, it means that when you sell your house, or pass away, you have cut into the equity in the home and there will not be any money for your or your survivors. That might be great for you, and if that is the case, a reverse mortgage might be right for you. You should decide this after you have educated yourself understand all of your options.
Julia Peoples is a long-time business manager focused on providing decision making assistance to the public. She works with people at key points of their lives who are making important retirement and financial decisions. She has had many articles published that educate the public on sound financial decision making.
Julia writes for those who are working towards financial freedom or a better understanding of how finances work. She has shared her financial insights with individuals on a one on one basis for years.