Are you considering a reverse mortgage? If so, you may be looking forward to the potential windfall that borrowing a substantial amount of cash can bring. However, there are some major considerations to take before choosing the route of a reverse mortgage – some of which make it an absolute “no” in the eyes of many.
It is important to learn reverse mortgages pros and cons before you move forward with this big decision. Here is everything you need to know before you make your choice – and some additional info about finding guidance throughout the process, whichever route you choose!
First written in 1961 to assist a widow who was in danger of losing her home after her husband’s death, reverse mortgages were created as a way for homeowners to borrow against the value of their homes. The concept is still essentially the same; those who take out a reverse mortgage are borrowing money they need now – with their home acting like collateral – and repay that amount over time.
If you already owe on your home, a reverse mortgage will increase the amount of debt you have against your property. This means paying that home off for much longer than you might have initially planned. Those that have already paid their home off and take out a reverse mortgage – also sometimes referred to as a “second mortgage” on that property will begin making payments again just as they initially did while purchasing their home.
Once a reverse mortgage is taken on a home, that loan won’t be settled until one of the following happens:
At that point – if the loan is not otherwise repaid – the home will be sold to compensate.
Is taking out a reverse mortgage a good idea? That depends on your situation. It also depends on the type of reverse mortgage you select. To make the best decision for your unique scenario, it is important to learn more about reverse mortgages pros and cons for each, and how they might fit your needs.
Home Equity Conversion Mortgages – also known as HECM – are the most popular and well-known types of reverse mortgages. One of the many reasons for this is that the money received from this type of borrowing can be used for nearly anything.
The process of the HECM is fairly straightforward; money is borrowed against the value of a person’s property, should they meet the age and home-equity requirements mandated. The higher the value of their property, the larger the payout of this loan can be.
How will you receive your funds if you elect to take out an HECM? There are several options; which you choose will depend on your individual needs and preferences. These include a lump sum, cash advances over a specified period, fixed cash advances over the length of your ownership of the home, and more.
The Home Equity Conversion Mortgage for Purchase is much like the HECM, except that the funds secured through borrowing against the value of one’s home are used specifically to pay for a new home. Many times, a person who chooses this route is looking to downsize or relocate. The loan that they take to pay for the new property often requires a very large down payment – 50%-60% or more – which mandates the funds obtained by taking out the reverse mortgage.
This type of reverse mortgage is the least expensive – and also the least flexible. They are designed to be used for a single, stated purpose only, and may be offered by a number of entities such as community or nonprofit organizations in addition to banks and other lenders.
Why would someone take this type of loan against the value of their home? Perhaps their plumbing needs work or their roof needs replaced. Regardless of what single, one-time expense they are facing, taking this type of reverse mortgage is one way to meet that need.
A proprietary reverse mortgage allows for a larger loan amount but is also offered by private organizations. This means that while these reverse mortgages can provide a bigger financial boost for homeowners, they also lack the government insurance coverage that the typical HECM has.
Why take that risk – and that type of loan? HECM reverse mortgages are limited to properties over a certain value – $679,650. This is not a home value that many Americans can boast, so to get the benefits of a reverse mortgage, they resort to taking out a proprietary reverse mortgage. There are no property value minimums with this type of loan and payment is available in a lump sum only. This can be very attractive to a homeowner in need of money right away – but it can also be a big problem if not handled properly.
With all types of reverse mortgages pros and cons are the deciding factors for those who are eligible for taking them. What are the advantages of taking these mortgages? In general, they include receiving funds that you otherwise do not have access to. This can be a boon for homeowners who need to do anything from relocate to renovate. The drawbacks of a reverse mortgage are similar to those of any line of credit. Repayment must be made – and adding that debt to existing expenses can make managing one’s finances harder than it has to be. It is all potentially very confusing!
If you’re still not sure or think you would benefit from professional guidance through the process of taking out a reverse mortgage, talk to the industry experts at the Van Horn Law Group. With extensive experience in the field, the knowledgeable and compassionate professionals at Van Horn Law Group can help you navigate major debt, complicated decisions like reverse mortgages, and more. Give us a call today to learn more!
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