I can tell you that Reverse Mortgages is one of the newest mortgage products in the market and it is specifically designed for senior citizens, You must be over the age of 62. By them taking a reverse mortgage they have the ability to supplement their income or social security.
In this page I will try to give you the rundown on what a reverse mortgage is and what it takes to get one. I work for one of the largest reverse mortgage issuers in the US. So you can say that I am quite knowledgeable of them.
Let's get started:
What is a Reverse Mortgage?
A reverse mortgage is a co-lateral loan based on the equity that a senior citizen has on their home. Unlike a forward or regular mortgage the senior is not required to make any payments to pay back the loan until they have either passed or are no longer living in the home. But, they are able to obtain the equity that they have in the home either through a Line of Credit, which they can access at any time, Payment Plan or Lump Sum at the time of closing. I will explain a little further the options in just a bit.
How to obtain a Reverse Mortgage?
I am sure that you have seen the commercials, you can find out on your own what companies offer them, one thing I will tell you is that the terms on it will be the same because it is a government backed loan and they set the guidelines that every lender must follow.
The lender will do an appraisal on the property to find out what the current appraisal value of the home is, from that appraisal value the lender will determine the maximum lending limit, It may also be called the maximum claim amount. The maximum lending limit is what helps determine how much the borrowers original principal limit is. Also a borrower must attend a third party counseling session that explains all the ins and outs of the reverse mortgage. There is always a charge for the counseling that usually is out of the borrowers pocket. The lender will not be able to open the reverse mortgage unless the borrower has finished the counseling session.
How much does it cost to obtain a reverse mortgage?
I will not lie to you, it is very expensive, of course, depending on the value of the home. These are the latest fees associated with the reverse mortgage. Again these fees are guidelines by the government and must be followed by all lenders:
Initial Mortgage Insurance Premium (MIP) it will be 2% of the appraisal value of the home, that means that if the home is appraised for $500,000.00 you will pay $10,000.00 just for this.
Origination fee just like MIP it will be 2% of the appraisal amount the difference is that it is only up to $200,000.00 and it will be 1% thereafter to a maximum of $6,000.00. For example, on a home that is worth $500,000.00 you will pay 2% up to $200,000.00 = $4,000.00 and 1% from $200,001.00 to $500,000.00 = $2,999.00 but no more than $6,000.00 total so in this case you will pay $6,000.00.
Closing Cost just like on a forward mortgage or regular mortgage all the cost associated with the closing of the mortgage will be the same with the reverse mortgage which are but not limited to the following: Title Insurance, Recording fees, Stamps, etc...
So in conclusion regarding the fees, the more your home is worth the more that you will pay. MIP has no limit and it is required by the government to have on a reverse mortgage, therefore, this goes directly to the government not the lender, MIP is what protects the borrowers and heirs in the case that the lender defaults or goes belly up it will also protect the borrower or heirs in the case that they end up owing more than what it is worth. However, it will only cover the difference in (between what the home is appraised for after the loan is called due and payable and what it is owed) the case that you are selling the home to another person with no relationship to you or the borrower. Origination fees is what you are paying the lender for opening the reverse mortgage for you. But wait, it doesn't end there. After the loan is open you have your monthly fees, which they are:
Monthly Interest Rate The rate could be either fixed or variable which is actually based on either the US Treasury bill + margin (The amount added by the lender to the Gov't rate) or the LIBOR (London Interbank Offered Rate) + margin.
Monthly Mortgage Insurance Premium
Same idea as to when you paid the initial MIP but this is a percentage which it should be about 0.50% of the outstanding balance of the loan.
Monthly Service Fee
Depending on your lender you may have a monthly servicing fee which it should be in between $25.00 and $35.00
How much do I qualify for?
It is very simple, the older you are the more you are able to obtain from the equity of your home, for example, the appraisal is done, the appraisal value of the home is $500,000.00, according to the age of the borrower the lender will give the borrower an amount that they can borrow up to based on their age, this amount is called the original principal limit.
What do I have left after all the fees?
Out of the Original principal limit you have to deduct: All closing fees, this will include Initial MIP and Origination fees if you are not paying them out of pocket at time of closing. Let's talk numbers, If you have a home that it is worth $500,000.00 and the calculated original principal limit is $325,000.00 minus all closing cost. you may be looking at possibly having access in between $290,000.00 and $300,000.00. At time of the appraisal it will be determined by the appraiser whether the home would need any repairs to be completed as a requirement for the reverse mortgage. If there are any repairs you must complete the repairs within a certain period of time after closing. Otherwise, you will default on the loan and the lender can freeze your funds until you are done with the repairs.
What programs are available to access my equity?
This is normally done before closing, your reverse mortgage consultant will ask how you will like your money after closing. Whether, you would like monthly payment disbursement and if so would you like a tenure or term. Perhaps, you may like a Line of Credit (LOC) which you can access at any time or maybe both the payment plan and the LOC. The final choice is the the Lump sum, this option I do not recommend, unless you are extremely good with money and you can invest it to get a better return than the interest you are being charged.
I have just given you some ideas about how the reverse mortgages work and if you have any questions let me know, post your comments and tell your friends. I will try to answer to your comments and questions once a week maybe twice.
Thanks for reading
