Retirement is a new phase in a person’s life and one that many look forward to. While it means a lot of free time to pursue passions that may have been put on the backburner, it also brings different sorts of expenses. Seniors who have to pay off debt, make major home repairs, or take a vacation can use a reverse mortgage to help them reach their financial goals. This kind of mortgage allows a debtor to convert home equity to cash.
A loan like this is an excellent choice for some, but not for everyone. Before signing on the dotted line, you should consider a few things. Here are some things you should note.
Costs Can Add Up
This type of mortgage, like any loan, grows when you add interest and charges to the principal. The longer it takes for you to pay the loan back, the heftier the total becomes. The principal can increase by tens of thousands of dollars, and without a basic understanding of how reverse mortgaging works, it has the potential to backfire.
Furthermore, you have to clear additional fees like insurance premiums and loan origination fees upon the loan closing. Other expenses include interest and servicing fees throughout the life of the loan. You can choose to add these to your loan, but that increases the principal, making it more difficult for you to keep up with the payments.
You Have to Pass a Screening
Individuals with considerable equity are the ones who get approved for this loan. The bank looks at your financials to ensure that you can pay property taxes, homeowner association dues, insurance, and upkeep. It is not to own the house on paper.
Furthermore, creditors also check reports on payment history and household debt. Once you do get approved, note that banks do not put taxes and insurance on escrow.
In the U.S., borrowers may only avail of reverse mortgages called HECM or Home Equity Conversion Mortgages. These are available only through FHA-approved lenders and have several requirements.
For one, the debtor must be at least 62 years old. They must also use their primary residence for the loan, which has to be a single-family home. Alternatively, it can be a property with two to four units, provided that the borrower occupies at least one.
Furthermore, it should meet FHA property standards and flood requirements. In case the property is a condominium, it should be in a building approved by the Department of Housing and Urban Development.
Are Reverse Mortgages Risky?
A fixed interest rate gives you a lump sum payment. Adjustable rates deliver money in several ways. You can choose to have tenure payments, which are monthly installments delivered for as long as you live on the property. You can also receive your payments over a term or a specific period. Finally, you can request for a line of credit, and take money out at your discretion.
According to the National Council on Aging or NCOA, it is best to have HUD-approved counselors inform you of your choices and their advantages and disadvantages. Not weighing your options can lead to serious financial repercussions such as foreclosure, interest rates stacking, or your home running out of equity.
Desert Springs Mortgage and Reverse Mortgages
Reverse mortgages are an excellent option for some seniors looking for an infusion of cash for their budget. The NCOA says that many people use this to pay off living expenses or debts, or as a second income. However, it is not a surefire way of eliminating financial troubles. For that, you need expert advice from people who understand your needs.
Desert Springs Mortgage is a Phoenix mortgage company that can walk you through the entire application process and connect you with your ideal lender for your reverse mortgage. We are a locally owned and family-operated business, and we assist our clients through the duration of their loan. Schedule a free consultation with us today by calling (623) 432-1309 for more details.