Most people think they are too young to plan for their retirement. But in reality, this is a process that should be started as early as possible. Here are a few things you need to follow if you want to make sure you have a comfortable life after your retirement:
Minimum age requirement of 62 years
The borrower of a reverse mortgage loan must be at least 62 years of age. In case you are living with your spouse, a partner or a sibling, you can include that person as a co-borrower, provider he/she is at least 62 years of age. The best part here is that your co-borrower can live in the home, in case you need to move out to a nursing home or an assisted living facility. He/she doesn’t have to worry about repaying the mortgage. Co-borrowers generally have the same rights when it comes to reverse mortgage.
Available only for primary residences
The criterion behind HECM is that you have to live in the house on which you take out a
Reverse mortgages are available to all home owners who are at least 62 or above. Many reverse mortgage lenders are on the lookout for prospective borrowers like you. They even try contacting directly by purchasing reverse mortgage leads. They will be more than willing to start up a line of credit for you even if you are as young as 62.
Reverse mortgage credit lines can be immensely valuable especially when the interest and the inflation rates are on a rise. The best part is that your credit line will keep growing over time. So the unused portion of the loan can be withdrawn at a later stage via monthly payments. Neat – Isn’t it?
You can sustain your retirement-income portfolio for a longer period of time by setting up a reverse mortgage line of credit as early as possible. You can let it grow as the interest rates rise. You can always tap into the line of credit whenever you need the money. This way, your money will last for longer.
This strategy is known as standby reverse mortgage or SRM. During times when investments such as stocks and bonds are down, you can draw from your credit line. This will give you a steady income till such time when your investments start recovering. By adopting this strategy, you are also allowing your investments to last longer.
Since you have already established your line of credit and have started to let it grow, you can expect a larger income as you age. However, the most important thing here is not to plunder your credit line for things that are not essential.
SRM – is it for you?
There is one downside to this strategy of SRM. It will reduce your equity. You might find it difficult when trying to move into another home or an assisted-care facility. Things may seem tougher for your heirs too. Considering the kind of fees that you will have to pay to set up your reverse mortgage, it becomes very important to think it over before you jump the bandwagon.
It takes time for your credit line to grow and offset the fees involved in setting it up. So, if you are thinking of moving out of your house and leaving it to your heirs in the coming years, it is better not to establish your line of credit so early.
How it works
Finding a lender to lend you a second mortgage can be tough. Although a few might get in touch with you through mortgage leads, there is no guarantee that they will actually approve your second mortgage application. Any lender may want to evaluate your personal as well as your financial situation thoroughly before agreeing to offer you the loan.
Not everyone may qualify for a second mortgage. Nevertheless, as a borrower, it is important to understand what lenders look for, before approving a second mortgage application.
Your home should have accumulated considerable amount of equity
Why refinance a reverse mortgage?
The first thing you need to understand is why a reverse mortgage may need to be refinanced. Unlike a conventional mortgage, here the goal is not to save money on the interest. Even if you do want to refinance a reverse mortgage when the rates are falling, you will not be able to offset the huge refinancing fee.
The term in case of reverse mortgage is not limited as in a conventional mortgage. It comes up for payment only when the borrower moves out of the house permanently or passes away. Such a period cannot be defined. Therefore it is not possible to shorten the term of the reverse mortgage by going for a refinance.
The main purpose behind refinancing reverse mortgages is to obtain more funds. This is possible only in the following scenarios:
- You have grown older: The older you get, the more amount you are entitled to borrow by way of a reverse mortgage. So if you obtained your original reverse mortgage when you were 62 and if you are 72 now, you can benefit by refinancing your reverse mortgage.
- Your home has appreciated in value: If the real estate market is at a healthy boom and if your home has gathered more equity that you can tap into, you can get more funds by refinancing your reverse mortgage.
- If FHA has revised its loan maximums: Although rare, this is also one scenario where you can expect to get more cash by refinancing your reverse mortgage.
When is it worthwhile to refinance a reverse mortgage?
It is worthwhile to refinance a reverse mortgage only if the excess amount you obtain totals upto two or four times the refinancing fees. For instance, if the origination fee of the new reverse mortgage is $10,000 and if the extra cash that you can get via refinancing your reverse mortgage is $45,000, it could be worthwhile to refinance your reverse mortgage. Ideally your new reverse mortgage must pass the “5 times benefit rule” for your refinancing to be really worthwhile.
Another scenario where refinancing a reverse mortgage could be worthwhile is when you want to add your younger spouse as a co-borrower, who may have just turned 62. By doing so you may ensure that your spouse will not be forced to sell your home after your death. Similarly, you can take out a new reverse mortgage even if you want to remove a borrower.
The current HECM limit is $636,150. In case the lending limit was less than this when you obtained your original reverse mortgage, it makes sense to refinance the same now.
If you want to switch over from a private reverse mortgage to HECM (Home Equity Conversion Mortgage) program that offers more benefits and better protection, it would be worthwhile to refinance your reverse mortgage.
When not to refinance your reverse mortgage?
Refinancing may not be economical if there is only a slight appreciation in your home value in the interim.
In case you want to change the way in which your funds are distributed (monthly payment to line of credit), refinancing may not be the right option. Instead, you can ask your existing lender to change this for you by paying up a modest fee.
Refinancing your reverse mortgage – the process
The first thing you need to know in order to refinance your reverse mortgage is to submit an application for a new reverse mortgage. This may be followed by a counseling session with a reverse mortgage counselor who has been approved by the FHA. Nevertheless, this session may not be mandatory if the new funds that you receive happen to exceed the value of the new origination fees by five times.
Your home will have to be appraised so that its current value might be determined. Based on this, the necessary changes will be made to your loan terms and your new reverse mortgage would be underwritten. Your current loan would be closed and new funds would be disbursed to you according to the disbursement option you have selected.
Yes, reverse mortgage refinancing might work to your benefit in many cases. However, do identify what you are going to do with the additional funds before you say “Yes” to the new reverse mortgage lender who may have come to you directly by purchasing
reverse mortgage leads.
Reverse mortgage loans can give the freedom to elderly homeowners, to live life, the way they want. They can leverage their home equity and borrow funds, as a lump sum, line-of-credit, or monthly payments, while enjoying the right to own and occupy their homes.
There are many smart ways to put reverse mortgage loans to use. Nevertheless, an option that might seem smart for someone may or may not be good for you. It all depends on your financial situation.
Here are a few things that will tell you how exactly you should use a reverse mortgage:
To pay off your
debts and large expenses
Question #1: Whom should I approach?
Many banks, financial institutions and private lenders offer reverse mortgages. However, before you choose the right lender you will have to look into various factors such as cost, loan servicing and the commitment that is displayed by the lender. You can check the lender’s rating with BBB (Better Business Bureau) and see if the lender has registered himself with the NRMLA (National Reverse Mortgage Lenders Association). You can probably get in touch with a few people who have borrowed reverse mortgages from the lender that you have shortlisted.
Most lenders buy the details of potential borrowers via
reverse mortgage leads
Upon the death of the reverse mortgage borrower and/or his spouse, the surviving spouse or the heir/s will get a letter from the loan service provider. This letter will explain all the rules of reverse mortgage repayment and asks you want you wish to do about your property and the loan. You will have to provide an answer to this question and keep the communication with the loan service provider, open.
Here are your options to answer this question:
- You can keep your home. However, you may have to pay back the loan. The maximum amount you may owe would be 95% of the appraised value of your home. This is irrespective of the fact that your loan balance happens to be more than this amount. You can sell one of your assets or a life insurance policy or go for a new loan in your name to pay back the reverse mortgage.
- You can sell your home, pay up what you owe and keep the excess amount with you.You can choose your own real estate broker and manage the sale your way.
- You may give your home to your lender by signing a deed-in-lieu of foreclosure. This option could be good enough for those borrowers, whose loan amount is more than their home value.
Being an HECM (Home Equity Conversion Mortgage) loan, reverse mortgage becomes due and payable if the borrower passes away. You can remove furnishings and your personal belongings; but not the fixtures.
In case you are the surviving spouse of the borrower but not a co-borrower, you can remain in the home for as long as you wish, without paying back the reverse mortgage loan. However, you may want to consult your attorney to find out your rights and options.
In case the lender forecloses while the spouse of the borrower is still surviving, it might turn into a serious legal issue. However, if the spouse of the borrower or heir fails to take any action, within the specified time frame, the lender can definitely foreclose.
This specified time frame might vary from one lender to the other. Also, as per HUD, you may even get an extension if you have been making reasonable efforts to sell or refinance your home.
As a lender of reverse mortgage, here is one thing you might have to do, in order to ensure you get the right amount of money from the spouse or heir of the borrower after the demise of the borrower – Get the home appraised in order to find the market value. If it exceeds the amount that is due, you can be sure that you will get the complete money. Nevertheless, if the amount due is much more than the actual market value of the home, 95% of the value is what you will get.
You can start looking for new potential borrowers right away. One best way would be to purchase
reverse mortgage leads
You can use your reverse mortgage payout to increase your pension and Social Security payouts
Most senior homeowners tend to use up their payouts from their pensions and social security as soon as they become available. In the meantime, they don’t understand that they are losing a chance on maximizing these payouts. By taking out a reverse mortgage, you can make yourself financially sound so that you don’t have to wait for these payouts. So, they keep increasing for as long as you don’t touch them. This applies to your other retirement assets too.
You can eliminate your monthly mortgage payments
Monthly mortgage payments take out a chunk of your income every month. If you have an existing mortgage on your home, you can pay it off by taking out a reverse mortgage. Not only would this help you eliminate your monthly mortgage payments, it will also give you some extra money that you can use up for your other needs.
You can have access to an ever-growing line of credit that is non-cancellable and low-cost
Reverse mortgage offers you the option of taking out money either as a lump sum, or as a monthly payout for as long as you stay in your home. You don’t have to worry about this being cancelled or about you having to pay up some fees. Reverse mortgage becomes repayable only when you move out of/sell your house or pass away. When one of these situations happens, you or your heirs repay the amount from the sale proceeds of your home. The best part is that if the reverse mortgage amount is more than the value of your home, you won’t have to pay back the balance.
You can safeguard the performance of your portfolio even when the market is down
When the stock market is down, it might become difficult to protect your portfolio, especially when there is no other source of finance. Nevertheless, with a reverse mortgage, you get enough incoming funds that will protect your portfolio until the market starts picking up. This way you get to decide when you want to sell your stock and at what price. It will keep you out of losses that could otherwise be difficult to avoid.
You can enjoy annuity-style payments
One thing that you would definitely miss in your retired life is a steady flow of income. You can opt to receive your reverse mortgage in annuity-style payments. This would solve your problem and help you enjoy a steady flow of income for as long as you live in the house.
You can replace your cash reserves by taking out a reverse mortgage
Retirement can deplete your cash reserves, leaving you with very little left as you get older. Taking out a reverse mortgage can help you replace those cash reserves that have started depleting. This way you can maintain your lifestyle and even speed up financially.
There are many more ways to make use of your reverse mortgage to plan your finances. If you plan well, you can be free of financial problems and enjoy your retired life.
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