There have been reverse mortgages for nearly 20 years, but they have not been caught on so that much as they have been during the current financial crisis. Seniors are turning towards these loans to tap the equity in their homes and in order to generate tax-free income so that they can pass their hard times.
You can take it with you
A reverse mortgage can be a good option for those people who want to relocate or move to a smaller home but they don’t want to put all of their cash into a new house or they might not qualify for a traditional mortgage.
According to the New rules that took effect in January seniors have been allowed to use a reverse mortgage to buy a new home. Assume that you own a house in Massachusetts worth $500,000 and you want to buy a $400,000 house in Florida. If you will sell your house and pay cash for your new home, then only $100,000 will be left to add to your savings. But if you took a $100,000 reverse mortgage on the Florida house, then you would be having twice of the amount and means $200,000 which will add to your savings.
How it works
Only those people who are at least 62 can take out a reverse mortgage. In addition, your house (current or future) must be your primary residence, and your mortgage must have been either paid off or only there should have been a small balance. Unlike a traditional loan, there are no requirements of income or credit-score, and you allowed to use the money as you wish. The older you are, the higher the appraised value of your home (up to the maximum federal loan limit) and the lower the interest rate will be and the more money you can borrow.
As part of the economic-stimulus package, the reverse-mortgage loan limit has been raised to $625,500 through the end of 2009. After that, the lending limit has been reverted to $417,000, unless Congress intervenes.
You are allowed to take your payment as a lump sum, a monthly cash payout, a line of credit held in reserve or it might be a combination of all three. No repayment is due until the time that the last homeowner moves out or dies, if this happens then the home can be sold to pay off the debt. It can never happen that the loan repayment exceed the home’s market value (even if it declines), absolving your heirs of any liability.
High fees
You’ll have to pay the usual closing costs, in addition to this you have to pay loan-servicing fees, an origination fee of up to $6,000 and interest over the life of the loan. Also, you’ll pay an initial insurance premium which would be equal to 2 percent of the home’s value plus 0.5% per month of the mortgage balance.
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