There's a useful, albeit fear-invoking, mortgage tool that's available to many homeowners, over the age of 62, who need to get some cash out of their homes to use for investing in other properties or any other financial needs they have.
"A forward mortgage, you make payments to. A reverse mortgage you receive payments from and based on the sum of money that you receive, interests accrues," says Michael V. Scarantino, founder and President of Florida Household Mortgage and Southern Tier Home Loans.
While the reverse mortgage may be a helpful tool, it's often perceived as undesirable.
"After 40 years there's this blight on them and that number one knee jerk is, 'I'm going to lose my home,'" says Scarantino. He says people have a fear of banks. "The bank will never own your home if you take a reverse mortgage unless you leave the home for a 365-day period; then you're deemed not to be a permanent resident such as in the case of a long nursing home stay."
According to Scarantino, the other ways that people default on a reverse mortgage are by not paying taxes or their homeowner's insurance. "That's it. There's nothing else that can remove them from their home. It virtually creates a life estate," says Scarantino.
Scarantino explains how the non-recourse mortgage works.
"Let's assume that at 77 years old, Mary B. Smith has a house worth $100,000, owned free and clear. She executes the instrument and gets a reverse mortgage and decides to take a line of equity credit (an account on the equity in the home). Let's say she lives to be 101 years old and is healthy enough to stay at home. What the bank has done is, every time that she has drawn money, the bank has started to accrue interest to that sum that she withdrew. Typically today it's a variable rate. There are very few fixed-rate long-term reverse mortgages," says Scarantino.
But how are the homeowner's heirs protected?
"On all government-backed reverse mortgages there is a mandatory two percent mortgage insurance premium that is paid upfront. That will cover any overages so that the taxpayers, in some future date, don't get saddle with that public debt or have to turn it into a public debt to satisfy and bail some lenders out. So the insurance premium takes care of that in the beginning," says Scarantino.
Scarantino says the first reverse mortgage was written decades ago. But there still remains a considerable amount of fear and misunderstanding surrounding it. This makes doing your homework an extremely important task. Separating fact from fiction can provide insight about if this style of mortgage is right for you. Here are some common questions and answers.
When is a reverse mortgage paid? A reverse mortgage is a loan against your home that you are not required to pay back as long as you live there. The loan is repaid from the borrower's estate or the eventual sale of the home when the last surviving borrower no longer lives in the home. Money can be received in a lump sum, monthly payments, or through a line of credit.
How do you qualify for a reverse mortgage? You must be 62 years or older to qualify and there are no income or credit requirements for a reverse mortgage. The amount you can borrow in a reverse mortgage is determined by your age, your home's value and interest rates. The older you are, the more you can borrow.
Will I lose my home? The bank never takes over the deed unless there is a default. Defaults can occur if the taxes and insurance are not paid current or the homeowner doesn't live in the home for a one-year period.
How you can benefit from a reverse mortgage? Reverse mortgages can be used to eliminate larger payments, free-up cash in order to invest, travel, pay for college educations, and many other expenses.
A reverse mortgage may be the answer for you, but first make sure you meet with an expert who handles these types of loans. Be sure that the expert fully understands your specific needs and can identify if this is the best approach for you. Also, be aware that reverse mortgages cost about one percent more than a traditional mortgage.
Author: Pheobe Chongchua
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