A reverse mortgage is exactly what it sounds like, it is the opposite of a traditional mortage. Instead of you paying the bank, the bank pays you. I know you are thinking that this sounds too good to be true, but there are requirements.
The biggest requirement is that you must be at least 62 years old, and you must have enough equity in the home to take out the mortgage.
A very common question that is asked about reverse mortgages is regarding your current mortgage and if you can add a reverse mortgage one top of it. You can still get a reverse mortgage even with an existing mortgage, however the reverse mortgage must be in the first lien position. In order to get the reverse mortgage in the first lien position you will have to pay off your existing mortgage. You can pay off an existing mortgage with a reverse mortgage.
You can choose to get all of the money from the reverse mortgage at once or you can elect to recieve monthly payments.
Without fees or interest invovled this would sound like an unbelievably good deal. You do not pay back the mortgage until after you move out of the home or you pass away. On most reverse mortgages you can expect to pay a monthly servicing fee of around $30. The calculation of the service fee involves your life expectancy converted to months and the amount of monthly servicing fee. Some reverse mortgages do not have a servicing fee.
The interest on a reverse mortgage compounds over the life of the loan and is paid at the end. The big costs of a reverse mortgage are the start-up fees. You will have fees like the origination fee (about 2% of the homes value), closing costs, insurance premiums, service fees and of course you will have to pay interest. Interest is based on the 1-year Treasury rate, plus a margin. The rate is usually adjustable but is capped at 2% a year or 5% over the life of the loan.
Usually the only time a reverse mortage is worth it is if the owners are planning to occupy the house for a while and or live out the rest of their lives in the house, because of the high start-up costs.
Reverse mortgages are EXTREMELY complicated and therefore require specialized counseling prior to finalizing the deal. Many scam artists have emerged to scam senior citizens out of their money, so beware of this. These loans are not cheap but they have a huge upside.
Important things to know:
-If the house sells and the proceeds do not cover the reverse mortgage, the lender is on the hook and not the heirs or the owners.
-If the house sells and there are gains made after paying back the mortgage, the heirs and or owners keep it all.
-The initial costs average about 5%, which are a lot, but if compared to selling your house and paying 6% to real estate agents, the 5% doesn’t sound so bad.
-You can not lose your home to foreclosure if you keep up on your payments such as insurance, taxes and home maintenance. (set up an impound account to make sure all payments are made)