If you own a house or are about to reach your retirement age chances are you must have heard about the reverse mortgage on various TV commercials or radio.
This type of alluring loan is attracting many senior homebuyers to dream of owning a home without stressing about loan payments.
Having said that, Reverse Mortgage for California is not for everyone, there are some pros and cons linked with it. Before considering this type of loan it’s imperative to know everything about it.
What is Reverse Mortgage?
If you have attained the age of 62 years or above, a reverse mortgage loan allows you to borrow cash or credit against home equity from a lender. Additionally, unlike traditional loans, you are not required to pay monthly payments instead when you or your legal heirs sell the house the loan amount is repaid.
Furthermore, HECM acronyms Home Equity Conversion Mortgage is one of the most common reverse mortgage types. Plus, these loans are insured by FHA (Federal Housing Administration), which simply means if the borrower fails to pay the loan FHA reserves will pay it. Not to mention, the borrower needs to pay an insurance premium along with a 0.5% annual premium of the outstanding debt to participate.
There are two different other reverse mortgage loans also in addition to FHA such:
- Single Purpose – The money acquired from this type of loan can be used for only one specific need which includes paying property taxes or for renovation. Plus, the option can be availed either by any state or non-profit organization.
- Proprietary – This type of reverse mortgage loan is obtained through any private lender; no FHA loan limit is applicable.
Who Qualifies For Reverse Mortgage Loan?
A reverse mortgage loan isn’t for everyone, putting the home on equity might be good for some but not for everyone. Below are some imperative factors that need to be considered:
Staying In Home For Long– Just like any traditional loan, there are myriads of upfront costs often associated with a reverse mortgage loan. So, be sure you are staying in the home for a long or 30-year mortgage for rentals to justify the upfront cost paid. So, if you are 62 or above and believe the adobe you staying in is your forever home then a reverse mortgage could be your safest bet.
Significant Increase In Home Value– If your home is on market and the value is surging at a rapid rate then reverse mortgage is worth opting for. At the time of selling your property might be valued more, you pay the loan and still have money to save.
Manage Household Daily Expense- Plenty of cash is required to maintain numerous expenses. If you are facing challenges in maintaining the expenses opting for a reverse mortgage can help you out in managing the same.
Who Should Not Opt for Reverse Mortgage Loan?
There are plethoras of reasons one should never take a reverse mortgage loan:
Staying In Home For Short Time- As mentioned above there are various upfront costs linked with reverse mortgage loans including closing costs, insurance premiums, and miscellaneous fees. So, if you plan to relocate or move into a smaller house, staying away from a reverse mortgage is a good choice.
Not Able To Manage Additional Costs– Paying property taxes on time as well as homeowners insurance and HOA fees are the key components of reverse mortgage loans. If you aren’t able to pay these mandatory costs it’s best to not opt for another debt.
What are the Advantages of Reverse Mortgage Loans?
1. Retirement is Secured
This loan is perfect for those who don’t have piles of cash in the bank or any kind of savings and investment. However, they do have home wealth built up. With reverse Mortgage rates by year, you can convert the illiquid asset into liquid cash and cover up your retirement expenses.
2. Home is Secured
Another astounding pro of reverse mortgage loan is without moving out of the house you can get cash, the asset is liquefied. You still live in the house, manage expenses, and get cash. Plus, by moving to a new place staying in a new neighborhood, or renting to a new location the cost associated with a reverse mortgage is cheaper.
3. Pay Your Home Loan
You don’t need to pay your home loan to qualify for a reverse mortgage. The cash you get out of reverse mortgage can be used to pay the existing home loan. Plus other household expenses can be easily managed.
4. Heirs Have Choices
Usually, a reverse mortgage is typically paid by the borrower either when they move out of the place, sell the house, or after demise. In this situation the legal heirs of the borrower have several options – they can keep the home and opt for refinancing in case the property value is lacking.
Or if the property value is less and debt is more they can give the house back to the lender. In this case, the lender will file a claim with FHA to recover the unpaid amount.
5. Proceedings Are Tax-Free
The amount a borrower gets from a reverse mortgage loan against the home is considered as a loan instead of income, according to IRS. Hence the funds are not taxed whereas the income earned from other retirement options like IRA is taxed under the law.
What are the Disadvantages of Reverse Mortgage?
There are some downsides also linked with reverse mortgage loans such as:
You May Lose Your Home
There are some fixed expenses linked with reverse mortgage loans you need to qualify i.e. homeowner insurance, property taxes, other household expenses, and most importantly HOA fees. Plus, you must be living in the house as the main residence.
Moreover, at any given point of time during the loan period you aren’t able to pay these mandatory expenses or not reside in the house, the reverse mortgage foreclosure can be opted by the lender and you might lose your home.
Conclusion
Taking a reverse mortgage loan might be the best decision of your life, 90% of people who opted for a reverse mortgage loan are happy and stress-free, living the life they wanted.
