If you own your own home, you can access the equity that you have in your house to turn it into a pension. The Reverse Mortgage option gives you a tax-free monthly payout or a lump sum which you don’t need to repay until you die or sell your home.
According to the rules of the Home Equity Conversion Mortgage program, you can take out a Reverse Mortgage even if you still have a small balance left on your mortgage. You can use the cash for any purpose — medical expenses, living expenses or even a vacation.
You don’t have to repay the HECM loan until you die or sell the home. Even then, you’ll never owe more than the amount of the loan.
Yet there are several issues involved in Reverse Mortgages that many people don’t know. Here are five points that you should be aware of when you start to consider taking out a Reverse Mortgage.
1. How much can you borrow? The amount of equity that you can access depends on your age, the current value of your home and the current interest rate. The maximum amount of home equity that is available in a federally insured Home Equity Conversion Mortgage is $625,000.
To get an idea of how much money you could access, go to the Reverse Mortgage calculator and check out your eligibility. Alternately, sit down with an agent at a lending institution to find out how much money you can expect from a Reverse Mortgage and get more details about the loan.
2. How much interest will be charged? The interest rate is fixed at the time you take out the reverse mortgage. You don’t have to actually pay the interest since it will accrue monthly and be added to the balance owed when the house is sold.
3. What other fees are involved with a Reverse Mortgage? Borrowers should prepare for other fees that add to the balance of the loan. This is one of the reasons that you should only take out a reverse mortgage if you are planning to remain in your home. for a long time.
Borrowers are responsible for paying a monthly fee for the up-front federal mortgage insurance premium (MIP). The MIP is designed to protect the lender against your longevity while, at the same time, protect you against owing more than the home is worth. This means that you will pay 0.5 percent of the funds that you withdraw in the first year. If you take more than 60 percent of the equity in a lump sum, upfront MIP is 2.5 percent. There’s an additional annual MIP premium which is equal to 1.25 percent of the outstanding loan balance.
You’ll also be expected to pay a monthly servicing fee, closing costs (appraisal fees, title search, credit check, etc) and the cost of a one-time mandatory counseling session with a HUD-approved counselor.
4. What other costs are involved in a HECM loan? You are responsible for paying property taxes and homeowner’s insurance and for keeping the property in good repair and paying any assessments if you live in a condo.
Your lender will do an assessment to ensure that your income can cover those expected expenses.
5. What happens when your leave the house? When you die, sell the property or permanently move into a nursing home, the accrued balance will come due if there’s no co-borrowing spouse. The house will then be sold to repay the loan.