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The National Council on Aging notes that reverse mortgages for seniors can be a valid part of an overall retirement plan. But they can also be complex financial tools, so it’s important to understand what you’re getting into if you choose to take one out. Find out more about reverse mortgages here to understand whether one might be right for you or your loved one.
A reverse mortgage is pretty much exactly what it sounds like. With a traditional mortgage, you borrow money to buy a home and make payments to the lender. With a reverse mortgage, you leverage the equity you have in your home and the lender pays you. Eventually, that money does need to be paid back, though, and details can depend on which type of reverse mortgage you opt for.
Home equity conversion mortgages (HECMs) are backed by the federal government and available through FHA-approved lenders. To qualify for this program, you must:
The lender will also check your credit and verify other financial information, and you will need to participate in an information session with a HUD-approved HECM counselor.
How much you can get with an HECM depends on the value of the home, the current mortgage interest rate and the age of the youngest person borrowing. It is also limited by the HECM maximum amount of $765,600.
The Federal Trade Commission calls single-purpose reverse mortgages “the least expensive option.” These types of reverse mortgages for seniors aren’t available everywhere and are offered through nonprofit organizations and some state and local government agencies.
Where available, these mortgages are typically reserved for those with low or moderate incomes. They’re also meant to be used for specific purposes as directed by the lender, such as paying off property taxes or providing necessary modifications or repairs to a home.
Proprietary reverse mortgages are not backed by the federal government and are issued by banks or other lenders. In many cases, these are options for people with higher home values because the lenders can provide funds outside of the scope of HECM limitations.
The exact mechanisms of a reverse mortgage depend on the loan type and your agreement with a lender. But the typical basics are as described below.
In addition to things like the age requirement, there are qualifications for taking out a reverse mortgage that vary by type. Single-purpose reverse mortgages, for example, have income limitations. In all cases, similarly to qualifying for traditional mortgage, you typically need a decent credit history and a certain amount of equity.
Only you can decide if a reverse mortgage is the right decision for you. Here are a few pros, cons and neutral points to consider when making a decision about this financial tool.
Reverse mortgages are one potential way to fund your retirement. But before you apply for one, make sure you’ve considered all the options and that this is the right one for you. Some other options to consider are summarized below.
You may be able to get cash flow out of your home with other equity funding options, including a home equity loan or a HELOC (a home equity line of credit).
If you have a mortgage still and the interest rate isn’t ideal, you might consider refinancing it. This could help you reduce your monthly mortgage payments, which would free up some money—plus, your home can still be an asset for you and your heirs.
Sometimes, moving out of a home makes the most sense. If the mortgage payment and upkeep is expensive, you could sell your home and move into a less expensive place. You would reduce your monthly expenses and could end up with extra cash from the sale of the home.
Consider checking your credit before you start shopping for a reverse mortgage, especially if it’s been a while since you last looked. Mistakes in reporting or even fraud might have caused inaccurate negative items to appear on your report, dragging down your score and reducing the chance you can get approved for a reverse mortgage. If you see anything questionable on your report, consider reaching out to CreditRepair.com to find out how we can help you put your credit history ship to rights again.
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