Should I Get A Reverse Mortgage?

Should I Get a Reverse Mortgage?

Karen Lyn Keyser
The Funding Master

Should I Get a Reverse Mortgage?

A reverse mortgage can be a good way for people 62 and older to turn their home equity into extra income that can supplement Social Security and withdrawals from savings/retirement accounts; making retirement more enjoyable than it otherwise might be. It is also a great alternative loan for purchasing a new home. The Reverse Mortgage will pay your mortgage and/or you can take loan proceeds in a lump sum, monthly payments for life, as a credit line or a combination of all of these.

One of the big appeals of this type of arrangement — as opposed to, say, tapping your home equity by refinancing or opening a home equity line of credit — is that you don’t have to repay the loan until you die or sell your house.

Another plus is that the payments you receive from a reverse mortgage may not affect your Social Security benefits (although they could affect your eligibility for programs like Medicaid and Supplemental Security Income, or SSI, the program that provides income to people with low incomes and disabilities).

Until recently, though, there’s been a practical problem for anyone who plans to use a reverse mortgage primarily as a line of credit that could be drawn upon when and if needed, versus taking out a large amount for some immediate need (renovating a home, replacing a car). In addition to interest expense and an annual insurance charge (now 1.25% a year) on the outstanding balance, the HUD’s popular Home Equity Conversion Mortgage reverse mortgage program also levies an initial one-time insurance premium of 1.75% of the value of your home.

That amounts to $5250.00 for a $300,000 home. You don’t have to pay this charge out of pocket. Still, it boosts the overall cost of borrowing, and can significantly drive up the effective annual interest rate you pay if you wind up drawing very little against the reverse mortgage or if you die or move from your home shortly after taking out the loan.

With the new option, you’ll still incur interest charges and the annual insurance fee. But if your initial disbursement is 60% or less of the allowed principal limit, the one-time premium is lowered to 0.50%. This makes a reverse mortgage a more viable option if you intend to use it primarily as a back-up line of credit or an emergency fund. You will still have to pay closing costs on the loan, which can include such expenses as an appraisal, title search and insurance, credit checks, mortgage taxes and lender fees. These costs may not have to be paid out of pocket.

Remember too that while HECM reverse mortgages are insured by the federal government, the loans themselves are made by individual lenders who do not all have identical guidelines. Compare the offerings of lenders before settling on a lender. For example, peruse the material on the reverse mortgage section of AARP’s site. Don’t commit until you’ve thought about all options and you understand all the loan program details.

Brought to you by: Karen Lyn Keyser | The Funding Master
970 W. Valley Parkway #262, Escondido, ca 92025 | 760-803-2075 / FAX 888-669-3397 |

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