The Consumer Financial Protection Bureau is embarking on a campaign to educate the American public about Reverse Mortgages. Many people are unaware of the differences between a traditional mortgage and a Reverse Mortgage. A traditional mortgage is used to buy or refinance a home. The lender lends you the money to buy or refinance the home and in exchange, you promise to pay back the lender the money you borrowed, plus interest, over many years.
A reverse mortgage, on the other hand, is typically used to access the equity that you have in your home. Instead of borrowing to buy a house, you are borrowing against a home that you already own. This allows you to use the cash for expenses that you have now, and pay back the loan when you die or sell the home.
The CFPB is concerned because potential borrowers are applying for a Reverse Mortgage without fully understanding the loan, its obligations or its consequences. CFPB has launched an information campaign to better inform the public about the loan so that each potential borrower can make the best decision for his or her own personal circumstances.
Reverse mortgages are designed for older homeowners who want to access their home’s equity (the investment that they’ve made in their home). In order to obtain a Reverse Mortgage you must be at least 62 years old and have paid off most, or all, of your mortgage.
Unlike traditional mortgages, reverse mortgages, including the government-insured HECM (Home Equity Conversion Mortgage) loan, do not require monthly mortgage payments. The interest and fees on a reverse mortgage are added to your loan balance each month and, over time, your home equity decreases as your loan balance grows. So it’s the reverse of a traditional mortgage.
It’s vital to be careful when you consider taking out a reverse mortgage. There are many factors to consider, including your age, your financial goals and needs and how long you expect to stay in the house. If you feel that it makes sense for you to take out the loan, be sure that you know about the fees and compare interest rates before you sign anything.
In the CFPB’s overview, the guide stresses three main points which potential borrowers should know before submitting their application.
*Verify who is signed onto the loan:
If only one spouse is signed onto the loan, the second partner can continue to live in the house after the signee has died or left the house, but will no longer receive Reverse Mortgage payments.
If anyone else is living in the home when the loan ends (for instance, a child) that person will be obligated to vacate the home and the home will then be sold by the lender, with the proceeds used to repay the loan.
*Calculate the loan fees and subtract those fees, along with the other loan obligations, from your expected loan income.
Upfront costs include lender fees, real estate closing costs and upfront mortgage insurance. Your upfront mortgage insurance charge is based on the size of your loan, and how much you choose to take out during the first year of the loan.
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Many borrowers choose to pay for the upfront costs using funds from their loan, rather than paying out of pocket. The CFPB reminds borrowers that paying for upfront costs with loan funds is more expensive than paying them out of pocket.
Loan maintenance fees include interest and ongoing mortgage insurance premiums. You must also continue to pay your homeowner’s property taxes, homeowner’s insurance and home maintenance costs.
A HECM loan can be a helpful tool, but only if you fully understand the loan’s implications.