Reverse mortgage is a loan made by a lender to a homeowner using the home as security or collateral. With a traditional mortgage, the homeowner uses their income to pay down the debt over time.
A reverse mortgage loan typically does not require repayment for as long as the borrower(s) continues to live in the home as the primary residence, pays property taxes and insurance, and maintains the home according to the Federal Housing Administration (FHA) requirements or until the last homeowner has passed away or has moved out of the property.
The amount of equity you can access with a reverse mortgage is determined by the age of the youngest borrower, current interest rates, and the value of the home.
Please note that you may need to set aside additional funds from loan proceeds to pay for taxes and insurance.
Some advocates and lenders have warned of a coming foreclosure crisis in Puerto Rico, but one top lender on the island says reverse mortgage borrowers rode out the recent storm much more easily than their forward counterparts.
Puerto Ricans are still cleaning up in the wake of Hurricane Maria, which made landfall on the U.S. territory as a Category 4 storm last fall. In response to the devastation, the Department of Housing and Urban Development instituted a moratorium on foreclosures through March 19 for all forward and reverse loans — and as the deadline approaches, some have sounded the alarm about the potential impact on homeowners.
“When I speak with my family in Puerto Rico, I hear the desperation in their voices,” New Jersey resident Maribel Soto told NJ.com last week. ”They don’t know when they will find employment again and when they will have stability in their lives. It’s unjust that companies are taking advantage of people at such a moment.”
While forward mortgage borrowers face a rough road making payments going forward, David Levis — president and CEO of the San Juan-based reverse mortgage lender The Money House, Inc. — said Home Equity Conversion Mortgage holders generally won’t face a similar fate.
“We haven’t had any issues with a borrower losing their entire home,” Levis said. “It’s because of the fact that most, if not all, of reverse mortgages in Puerto Rico were given to people who have cement, concrete walls.”
Of the thousands of people who have obtained reverse mortgages through The Money House, Levis said only one experienced storm damage sufficient enough to raise an issue. Otherwise, most homeowners with HECMs have only experienced minor damages with repair costs in the $1,000 to $2,500 range — and homeowners’ insurance companies have been paying out claims quickly.
In addition, Levis noted that homeowners in Puerto Rico generally only pay their taxes and insurance fees once or twice per year, and since residents have been granted a wide variety of storm-related exemptions — including credit cards and utility bills — many had the cash on hand to prioritize those payments even during
“The reverse mortgage program was pretty safe, because of the structure of the program,” Levis said.
Single-family homeowners have benefited from decades of smart planning, according to Levis. After the island was battered by Hurricane Hugo in 1989 and Hurricane Georges in 1998, local officials strengthened building codes and homeowners increasingly opted for the safety of concrete-walled homes over more vulnerable wooden structures. Those storms also destroyed a significant amount of wood-framed homes, thinning out the overall proportion of the properties in the island, Levis said.
While Levis hasn’t seen too many reverse mortgage-related issues, other lenders — both forward and reverse — may have no choice but to initiate proceedings once HUD suspends the moratorium. Kristen Sieffert, president of Finance of America Reverse, told NJ.com that HECM lenders aren’t entirely in control the foreclosure process: HUD remains at the wheel.
“Given that ]FAR] does not have control over foreclosure timelines with respect to insured loans, we believe the best outcome for homeowners in this area would be an extension of HUD’s foreclosure moratorium, and intend to advocate for this extension directly to HUD,” Sieffert said.
With mortgage interest rates still as low as they are, paying cash for a house should not be first on your list of financial priorities. Saving for retirement, building adequate emergency savings and paying off higher interest debt almost always take precedence.
That said, if you have the means to pay cash for a home, there are situations when buying your house outright is the way to go.
Reasons to keep your cash
The two big reasons to take out a mortgage even if you can afford to pay cash are maintaining liquidity and maximizing returns.
Paying all cash, while commendable, isn’t a good idea if it means committing too much of your savings to an asset that is inherently illiquid. “You don’t want to get into a situation where you are forced to sell the house or other investments at the worst time possible,” says Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors in Plano, Texas.
Meanwhile, with rates at incredible lows – and mortgage interest deductible – paying cash is the equivalent of locking in an investment that returns roughly 3% to 4% a year. Investors who feel they can earn more than that in the stock and bond market will often choose to get a mortgage and keep their cash invested.
There is a middle ground, and for many buyers this may be the best option of all. Take out a mortgage and lock in today’s historically-low rates, but make more than the minimum payment whenever you can.
Reasons to pay all cash
On paper, locking in low rates on a mortgage and investing that money instead certainly seems like the better deal right now. Yet, what that equation doesn’t account for is the enormous sense of satisfaction that comes with owning your home outright. Yes, odds are that you will make more over the long run investing those funds, but what you save on interest over the life of the loan – tens of thousands, if not hundreds of thousands of dollars – isn’t vulnerable to market ups and downs.
In the most competitive housing markets, moreover, cash buyers have the upper hand in bidding wars and also have a better shot at negotiating for a lower price. Add to that savings on closing costs and time spent shopping for a loan, and the deal is even sweeter.
Assuming you’ve paid off higher interest debt, are maxing out on tax-advantaged retirement plans and have more than enough money in your rainy day fund, paying for a house with cash isn’t such a bad move, says Krishnaswamy. Just make sure that doing so doesn’t put the rest of your financial house in jeopardy.
A common false impression with the reverse mortgage loan is that the procedure may be a lengthy one. This simply isn’t the case. The technique for receiving a reverse mortgage at one reverse mortgage is an easy 4 step process. Right here is what you can expect during the reverse mortgage process.
1: Communicate with us, completes the application and counseling
Step one is to give us a call and speak with a certified professional. They can evaluate your situation with you and decide if a reverse mortgage is good for you or not.
If this system makes sense for your financial goals an application can be sent out to you.
We will assist you with the paperwork and assist you in figuring out the fine way to acquire your money out of your new reverse mortgage.
You may select to receive your money in a
Lump sum – take all of your cash today
Time period payments – equal amount of cash for a fixed length of months or years
Tenure payments – like time period payments however they do no longer leave until you are now not occupying the home
Or a combination of the above payment methods. As an instance, partial lump sum with the remainder paid to you monthly.
Not exactly sure what choice you need to pick out? Your licensed mortgage expert will evaluate your occasions with you in as much detail as you need. They are able to help you make a decision based on your life style, your desires and your desires in your retirement.
The U.S. Department of Housing and Urban Development (HUD) requires that each one candidate receive 1/3-celebration counseling to explain the available options and info of a reverse mortgage. We offer you a listing of counselors on your place and you can pick out one from the list. You pay a fee for the counseling consultation, which normally takes about an hour.
2: Appraisal inspection
The next step after counseling is to get your home appraised. The appraisal is nearly as quick as the counseling session. Appraisals normally cost about four hundred dollars. One reverse mortgage does not make a profit from those proceeds; you pay what we pay.
After appraisal, the loan goes to the underwriting procedure in which all of the files are revised and finalized.
3: Closing and Disbursement
When it’s time for closing, we can come to you with all of the documents to sign… it’s that easy!
Before disbursement there’s a period during which you could pick out to cancel the transaction.
Federal law wants us to attend until we’re sure you haven’t canceled earlier than we disburse your budget.
Once you get your proceeds, you could use the money to pay off any debts you choose or to spend the cash wherever you want.
4: Repayment
During the loan period, you may not have to pay monthly mortgage charge* to your lender.
But, you will remain answerable for the charge of taxes, insurance and maintenance.
Reverse mortgages become due whilst the borrower(s) now not occupies the home.
If borrower dies, the heirs/estate may pay off the mortgage from the sale of the home or refinance the house.
That’s the brief and easy Reverse Mortgage process.
*homeowner is still responsible for taxes, insurance and property preservation.
The interest rates on HECMs are comparable to other fully amortized mortgages. The interest rate a borrower pays is made up of the “index” and the “margin.”
The index is the market interest rate – the London Interbank Offered Rate (LIBOR) index is commonly used. The margin is set by the lender, and depends on the level of service offered to the borrower. As of November 2016, the NRMLA website calculates reverse mortgage examples using a variable 1-month LIBOR index of .533% with an average margin of 2.50%, for a current reverse mortgage loan interest rate of 3.033% (known as the Initial Loan Interest Rate).
Other rates and indexes are also available for example calculations.
While the interest rate index can change over time for an adjustable interest rate loan, the margin cannot change and stays the same throughout the loan term.
With reverse mortgage loans, the borrower’s specific needs usually influence the choice of interest rate (fixed or adjustable) and the method of distribution (how and when the borrower can access their money). A line of credit and monthly disbursements, for example are available amongst other options.
As mentioned before, some fees are put in place for borrower protection and many fees are federally capped or strictly regulated to provide an additional level of security for the borrower. Some fees can be waived or negotiated, and most of them can be rolled directly into the loan itself, greatly minimizing the impact of upfront, out-of-pocket expenses.
*Interest rates mentioned are for illustrative purposes only and are not an offer to lend. Interest rates and amortization, mortgage insurance premiums (MIP), origination fees, lender margins, payment options and closing costs are subject to change and may vary.
Amortization tables and APR calculations will be provided by your lender in the loan application package. A good faith estimate of closing costs, TALC disclosure and other disclosures will also be provided on the loan application as required by the Truth in Lending Act and Regulation Z.
If the first question people generally have approximately this economic tool is “how does a reverse mortgage works”, the question is whether it is good you. The facts and circumstances vary in every case, which it is why it’s essential to participate in a session with a reverse mortgage counselor first. But, here are some common faces that make reverse mortgages a good match:
You plan to live in your property for a long term. Because of the main upfront prices involved in a reverse mortgage, the economics make the most sense in case you plan to live in your property for a long time. In case you’ve been thinking about moving for retirement or in any other case giving up the house, a reverse mortgage may not be for you.
You have self-assurance for your health. One aspect of being able to plan on a long-term commitment to staying in your own home is whether or not your personal and own family medical histories suggest you’ll be capable of hold to handle living there. It facilitates if the property can be made reasonably senior-friendly.
Your financial sources are limited. A reverse mortgage makes the most sense if you do now not have accessible resources to draw upon for retirement.
You have been not relying on leaving the property to heirs. The reverse mortgage may additionally wipe out all or some of the equity in your property, and except your property pays off what you’ve got borrowed whilst you pass, the property will go to the lender.
As with other loans and credit score, reverse mortgage interest rates are charged at the finances that you acquire from your loan. These expenses are calculated every day and add up to the loan balance month-to-month, and may be getting on every borrower’s month-to-month statement.
The specific component of reverse mortgages is that interest payments on your loan are deferred to the end of the life of the loan: they are no longer paid up-the front, out-of-pocket, or month-to-month.
At the same time as maximum loans require month-to-month minimum payment to repay the loan payment and all associated interest expenses over the years, reverse mortgages defer all mortgage and interest repayment to when the mortgage matures.
These loan maturity activities come approximately if:
The house is offered
All the debtors either shift out of the home or die
The loan goes into default via a borrower’s failure to pay property taxes and property owner’s insurance, and comply all terms related with loan
For your research, there’s some interest fee jargon that could intimidate you from getting a reverse loan, but you don’t need to fear. With help from this article and your personal reverse loan expert, you may study everything you want to learn.
How Are Reverse Mortgage Interest Rates Calculated?
Fixed Interest Rates:
Fixed interest rates are usually determined upon by using investors and many government corporations whose work is to hold these prices stable. For example, the National Reverse Mortgage Lenders Association (NRMLA) reverse mortgage calculator lists an average HECM fixed rate of 5.060% for the month of December 2016. Real rates are available to borrowers will vary and are depending on different loan factors.
Variable Interest Rates:
Variable rates are different from fixed rates in that they’re composed of two parts: which are; an index and a margin.
Index – an index is a fixed fees that adjustment depending on market interest rates. It is not controlled by lender. The fee charged on your loan can be up or down depending on if the index goes up or down. On the time of writing (December 5, 2016), the variable 1-month LIBOR index is indexed at 0.62% and the variable 1-year LIBOR rate at 1.65%.
The LIBOR index (London Inter bank Offered Rate) is the charges at which banks borrow cash from different banks, and this is the index that variable rate loans are based totally off of.
Currently, all HECM reverse mortgage variable rates are LIBOR based. The 1-month and 1-year LIBOR prices are usually used.
Margin– The margin is the interest percent that is added to the index by using the lender. The margin rate is not adjustable, which means that after loan origination, the margin stays the identical in the course of the mortgage term, regardless of what the index may also change to.
Reverse mortgage loans usually are repayable when you die, but might also want to be repaid sooner in case you now not use the house as your main house, or fail to pay taxes or insurance, or make important maintenance.
Maximum reverse mortgages are home equity conversion mortgages (HECMs). The federal housing management (FHA), a part of the department of Housing and Urban Development (HUD), insures HECMs. A HECM loan must be paid off while the closing surviving borrower or eligible non-borrowing spouse dies. The loan also will become due when the closing surviving borrower sells the house or permanently moves out.
The main requirement of HECM is you live in your property as your main house. When the home is no longer your primary residence and you are the borrower, your loan will become due.
Every calendar year, you’ll be required to certify in writing that you occupied your home as your main house.
You’re absent for a majority of the year for a non-medical purpose; or
You are absent for more than 12 consecutive months for a medical purpose
If you have a co-borrower, your co-borrower can preserve living inside the home – and the mortgage will not end up due – even in case you die or pass out of the house.
A reverse mortgage loan also becomes due if you are not paying your home taxes or homeowner’s insurance, or fail to maintain the home.
Advantages and Dis-advantages are varies from person to person or we can say circumstances to circumstances.
But here we are going to discuss advantages of reverse mortgage.
Access the home equity for many home owners who are 62+ years old, their home is their biggest asset. A HECM loan permits the borrower to convert a part of their home equity into usable budget.
No monthly mortgage payments – no mortgage payments are required for so long as the borrower keeps meeting the loan obligations.
No cash required – most of the closing expenses and costs associated with a HECM loan can be financed into the loan, so out of pocket charges are kept to a minimum.
Flexible disbursement options – Loan proceeds can be taken as a lump sum (fixed-Rate-Only), a line of credit to be drawn upon as needed, a monthly fee for a fixed period of time or so long as you live within the home, or a combination of those options. Loan proceeds aren’t taxed as earnings or otherwise.
Qualifying may be less difficult than for a conventional mortgage – you must meet the age necessities, have enough equity in home, live in the home as your main house, the home have to meet FHA property requirements, and you must meet financial eligibility criteria as defined by the U.S. Department of Housing and Urban Development (HUD).
Non-recourse clause –HECM loans have a non-recourse section which protects the borrower and his/her heirs from ever having to pay again greater than what the home is really worth.
FHA mortgage insurance premium (MIP) – HECM loans are insured by Federal Housing Administration (FHA). The mortgage insurance ensures that you’ll get hold of expected loan advances. As part of your loan you may finance the mortgage insurance premium (MIP).
HECM Counseling – counseling with a permitted HECM counselor is required. The counselor will discuss program eligibility necessities, financial implications and other options to acquiring a HECM and repaying the loan.
Reasons to keep your cash
Robert Jackme Blog for Reverse Mortgage 