Thursday, May 10, 2018

12 Key Reverse Mortgage Questions – Answered

12 Key Reverse Mortgage Questions – Answered
The following reverse mortgage questions and answers should give you a reasonable idea about the basics concerning these loans. But a single article can only be the start of your gaining a full understanding, so read more widely, and ideally talk through your plans with an independent federally approved housing counselor who specializes in reverse mortgages.

1. Who Can Get a Reverse Mortgage?

You must be a homeowner age 62 years or older. If more than one borrower is named in the loan agreement, the younger or youngest must be at least 62 years.

Generally speaking, the older you are (or the youngest co-borrower is), the greater the benefits you're going to get. That's because the lender expects to lend you the money – and maybe pay you an annuity – for a shorter period if you're older. Learn more at How Your Age Can Affect Your Reverse Mortgage.

2. Can I Have a Reverse Mortgage and an Ordinary Mortgage at the Same Time?

Afraid not. Probably most people applying for reverse mortgages own their homes outright. However, if you have a small balance on your existing loan, you can use part of the proceeds of the new one to finish paying it down.

3. What's the Difference Between a Reverse Mortgage and an Ordinary Mortgage?

An ordinary mortgage is a long-term loan that helps you buy a home by spreading the cost over years or decades. A reverse mortgage is still a loan, but it lets you access some of the value of your home without your having to move. Typically, the lender will pay you each month rather than you paying the lender, as you would with an ordinary mortgage.

You don't necessarily have to see a reverse mortgage as a lifelong commitment. Read about your options if you change your mind at How to Get Out of a Reverse Mortgage (Without Actually Dying).

4. How Do I Pay Back the Loan?

Wiht a reverse mortgage, you don't make monthly or other regular payments. Instead, those payments will be regularly added to your loan balance and will have to be paid eventually. That normally happens when you die or sell your home.

5. Can I Face Foreclosure with a Reverse Mortgage?

Your lender can't foreclose on the grounds you're in arrears on your payments. Since you don't have to make monthly payments, you can't get into arrears.

But you still have certain financial obligations: You must keep up with property taxes, maintain your home in a reasonable condition and pay to insure it. Fail to do any of those, and your lender could foreclose.

6. How Can I Be Sure I'll Be Able to Meet Those Obligations?

If you don't have plenty of other financial resources, you can choose to take part of the proceeds of your reverse mortgage in the form of an "annuity." One of those provides fixed monthly payments to you either for an agreed period or for the rest of your life.

If you opt for the latter (payments until you die), make sure the amount you receive each month is enough for you to meet those financial obligations that come with your loan, and – along with your other income – to live comfortably. But the bigger your annuity, the smaller the lump sum or line of credit you'll get from your reverse mortgage.

7. Is a Reverse Mortgage a Good Stopgap Until I Move?

Definitely not. Reverse mortgages are often an expensive way to borrow for short-term needs. Don't forget, they come with closing costs, just like any other mortgage, though those costs are usually rolled up within the loan. And deferred monthly payments mean your share of your home's value will continually be whittled away by accumulating interest charges.

If you think you're likely to want to move in a few years' time, consider bringing forward the date when you downsize, or explore alternative forms of borrowing, such as a home equity loan.

8. What Happens If the Accumulated Interest Exceeds the Value of My Home?

Nothing. Let's hope you live for a very long time, which might mean the decades of interest that builds up is higher than the value of your home when the reverse mortgage ends – when you sell or die.

That would the lender's problem, and not yours, your estate's or your heirs'. In other words, the lender can't ask anyone else to chip in if it makes that sort of loss on your loan.

9. What Happens to Other People Living in My Home When I Die?

It's likely the lender will foreclose when you die, and anyone living there will have to move out. And that may include your spouse.

A 2013 court case (Bennett et al. v. Donovan) did provide some protection for spouses in certain circumstances, but it's still generally a good idea to have your spouse or partner named on the loan agreement as a co-borrower if you want them to have the right to remain in residence after your death. As long as one co-borrower is alive, he or she has the same rights to stay put as the person who died had.

Certainly, this is an aspect of the loan that requires great care, and you should take independent, professional advice over it. And don't rely on what the salesperson tells you: In Bennett et al. v. Donovan, the plaintiffs alleged their broker lied to them over this.

10. What's the Difference Between a Reverse Mortgage and an HECM?

Home Equity Conversion Mortgages (HECMs) are a type of reverse mortgage. The difference is they're backed (insured) by the federal government through the Federal Housing Administration (FHA).

That means they sometimes provide greater consumer protections than reverse mortgages that are wholly private-sector products. But those private-sector ones may be more flexible.

11. How Do I Get My Money?

Loan benefits can generally be taken in four ways:

Lump sum
Monthly payments – either for an agreed period or for the rest of your life
Line of credit
A combination of the above
This is one area in which HECMs have strict rules, but private lenders may be more flexible. Discover more at Reverse Mortgage Proceeds: What's Best?

While you're in the mood for reading, also check out the tax implications of one of these loans. The news is good!

12. Am I Good to Go?

Definitely not. Taking on a reverse mortgage is likely to be one of the most important financial decisions of your life, and it's one that needs a lot of thought and reading. These 12 answers to reverse mortgage questions are far from enough for you to make an informed decision, though they may help you decide whether you want to explore further.

If you opt for an HECM, you're going to have to have mandatory counseling from a specialist reverse mortgage counselor approved by the U.S. Department of Housing and Urban Development (HUD).

If you prefer to get a wholly private reverse mortgage, you won't have that obligation, but you'd be wise to get your own advice from a credible independent professional you can trust. And you can still use one of those inexpensive HUD-approved counselors even if you opt for a private loan.