As the baby-boomers prepare for retirement reverse mortgages are going to be the next mortgage boom according to most analyst. The baby boom began in 1946 and continued through 1964. During those 19 years, 76 million people were born. As this segment of America begins to retire a large portion of them will need to rely on their homes equity to make "ends meet." How they access that equity will be the mortgage industries primary focus in the years to come.
The traditional "forward" mortgage has the homeowner borrow the money by way of a traditional mortgage or home equity line and make payments on that amount. The homeowner takes the money, places it in a safe interest bearing account and uses the money to augment their income. The interest that is earned on the money is used to supplements the monthly payment that the homeowner has to make. The problem is that the interest shrinks as the money is used and the mortgage payments stay the same.
Reverse mortgages have actually been around since 1989, but their popularity is skyrocketing as a result of the wave of baby-boomers that are retiring. These mortgage products are safe and beneficial when applied to the right homeowner and circumstances. Lendfast.com recommends that borrowers use FHA-insured Home Equity Conversion Mortgage (HECM) when considering these mortgage products. Getting a reverse mortgage from the private sector may include more headaches and costs. However, as with financial product, there are some dangers that you need to be aware of; here are the top three reverse mortgage pitfalls to lookout for.
1) Repayment and Forfeiture – Most, if not all reverse mortgages will not require you to make payments or repay the loan for as long as you live. Once you pass on your heirs will have the opportunity to remortgage the debt or sell the house and repay the loan. If the home has equity above the amount owed to the bank your heirs will receive those proceeds. If the home is "upside down" your heirs have no obligation to repay the debt, but they will forfeit the home unless they pay the amount owed.
However FHA rules state: "When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender." The danger here is "no longer use it for your primary residence. This means if you have to go to a hospice, nursing home or intend to live in another home and use the house as a second home the bank will call the debt due. This is definitely something you want to consider before taking out a reverse mortgage.
2) Cost and Interest Rates – At the inception of reverse mortgages they were almost exclusively offered with adjustable interest rates. Adjustable rates are still standard practice and you are almost certain to be offered this option to begin with. Don't! There are fixed rate programs available now and at today's rates adjustable rates are only going to go up in the future. It's easy to be lured into an adjustable rate because lower interest rates in a reverse mortgage have higher monthly payments. If the interest rate increases your payment decreases, as does the time frame you have to draw on the mortgage. Just remember, adjustable interest rates are a gamble and Las Vegas wasn't built on winners.
A considerable downside to reverse mortgages is the high up front costs. This cost can be compensated by a lower interest rate over time, but some seniors choose other options to draw on their home equity. Reverse mortgage closing costs should be about the same as most loans except the 2% mortgage insurance premium that FHA charges to insure the loan. FHA insures the lender will be paid regardless of the home's value when and if the lender has to take over the property.
At Lendfast.com we have noticed that many homeowners are paying higher closing costs for reverse mortgages than traditional forward mortgages. We believe this is because most homeowners are unfamiliar with reverse mortgages and tend to not shop around as with traditional mortgages. This is why we recommend the FHA insured type of reverse mortgages because they have closing cost limits that lenders must abide by. Always get two quotes or use the "lenders compete" method to apply for a reverse mortgage. You should also read How Does a Reverse Mortgage Work an article that explains reverse mortgages better.
3) Upkeep, Taxes and Insurance – On traditional mortgages your escrow payments are added to your payment but they are subtracted from your monthly check on a reverse mortgage. Most of the time you will be shown the monthly amount you will receive each month BEFORE the escrows are taken out. This means that you could sign up expecting to get $900 per month and only receive around $700. Make sure you are given the monthly payment LESS your escrow payment. Like most mortgages you will usually be given the option to escrow or not to escrow, however the bank has a vested interest in your home. Meaning if you do not maintain your insurance and taxes as they deem responsible they can call the loan or force an escrow account on you.
When you consider that the bank is basically buying your home you can understand why they would want you to keep their property in good shape. The problem is that this loan is being made to senior citizens. As they age they may become unable to do the necessary maintenance that the bank requires."Good shape" can mean thousands of dollars out of pocket for the homeowner when you consider what a new roof or a fresh coat of paint costs these days. Ask the loan officer what the lenders policy is on maintenance and repair. You may want to take enough money up front to have future repairs taken care of so that your monthly payment stays the same.
The traditional "forward" mortgage has the homeowner borrow the money by way of a traditional mortgage or home equity line and make payments on that amount. The homeowner takes the money, places it in a safe interest bearing account and uses the money to augment their income. The interest that is earned on the money is used to supplements the monthly payment that the homeowner has to make. The problem is that the interest shrinks as the money is used and the mortgage payments stay the same.
Reverse mortgages have actually been around since 1989, but their popularity is skyrocketing as a result of the wave of baby-boomers that are retiring. These mortgage products are safe and beneficial when applied to the right homeowner and circumstances. Lendfast.com recommends that borrowers use FHA-insured Home Equity Conversion Mortgage (HECM) when considering these mortgage products. Getting a reverse mortgage from the private sector may include more headaches and costs. However, as with financial product, there are some dangers that you need to be aware of; here are the top three reverse mortgage pitfalls to lookout for.
1) Repayment and Forfeiture – Most, if not all reverse mortgages will not require you to make payments or repay the loan for as long as you live. Once you pass on your heirs will have the opportunity to remortgage the debt or sell the house and repay the loan. If the home has equity above the amount owed to the bank your heirs will receive those proceeds. If the home is "upside down" your heirs have no obligation to repay the debt, but they will forfeit the home unless they pay the amount owed.
However FHA rules state: "When you sell your home or no longer use it for your primary residence, you or your estate will repay the cash you received from the reverse mortgage, plus interest and other fees, to the lender." The danger here is "no longer use it for your primary residence. This means if you have to go to a hospice, nursing home or intend to live in another home and use the house as a second home the bank will call the debt due. This is definitely something you want to consider before taking out a reverse mortgage.
2) Cost and Interest Rates – At the inception of reverse mortgages they were almost exclusively offered with adjustable interest rates. Adjustable rates are still standard practice and you are almost certain to be offered this option to begin with. Don't! There are fixed rate programs available now and at today's rates adjustable rates are only going to go up in the future. It's easy to be lured into an adjustable rate because lower interest rates in a reverse mortgage have higher monthly payments. If the interest rate increases your payment decreases, as does the time frame you have to draw on the mortgage. Just remember, adjustable interest rates are a gamble and Las Vegas wasn't built on winners.
A considerable downside to reverse mortgages is the high up front costs. This cost can be compensated by a lower interest rate over time, but some seniors choose other options to draw on their home equity. Reverse mortgage closing costs should be about the same as most loans except the 2% mortgage insurance premium that FHA charges to insure the loan. FHA insures the lender will be paid regardless of the home's value when and if the lender has to take over the property.
At Lendfast.com we have noticed that many homeowners are paying higher closing costs for reverse mortgages than traditional forward mortgages. We believe this is because most homeowners are unfamiliar with reverse mortgages and tend to not shop around as with traditional mortgages. This is why we recommend the FHA insured type of reverse mortgages because they have closing cost limits that lenders must abide by. Always get two quotes or use the "lenders compete" method to apply for a reverse mortgage. You should also read How Does a Reverse Mortgage Work an article that explains reverse mortgages better.
3) Upkeep, Taxes and Insurance – On traditional mortgages your escrow payments are added to your payment but they are subtracted from your monthly check on a reverse mortgage. Most of the time you will be shown the monthly amount you will receive each month BEFORE the escrows are taken out. This means that you could sign up expecting to get $900 per month and only receive around $700. Make sure you are given the monthly payment LESS your escrow payment. Like most mortgages you will usually be given the option to escrow or not to escrow, however the bank has a vested interest in your home. Meaning if you do not maintain your insurance and taxes as they deem responsible they can call the loan or force an escrow account on you.
When you consider that the bank is basically buying your home you can understand why they would want you to keep their property in good shape. The problem is that this loan is being made to senior citizens. As they age they may become unable to do the necessary maintenance that the bank requires."Good shape" can mean thousands of dollars out of pocket for the homeowner when you consider what a new roof or a fresh coat of paint costs these days. Ask the loan officer what the lenders policy is on maintenance and repair. You may want to take enough money up front to have future repairs taken care of so that your monthly payment stays the same.
Having bad credit can lead people to think their loan options are very limited. In fact, most home buyers tend not to know the fully array of loan options available, or even the areas different lenders can specialize in. The result is they miss out on opportunities, like 100% financed mortgages.
There are lenders who specialize in loans with bad credit and who even offer 100% mortgages approved with bad credit. These lenders have different ways in dealing with applicants with low credit scores, so as to off-set the risks that turn most lenders off the idea of approving them.
Applicants with low credit ratings are better off applying to lenders who specialize in the low credit financing because most traditional lenders would easily disregard them. And even worth those willing to accept bad credit applicants, the chances of securing mortgage loans financed at 100% are very slim indeed.
Approval with Bad Credit
Applying for a mortgage is not difficult as long as the applicant can find the right lender to apply to. Many applications gain approval if the necessary criteria are met, but the lender must also be suitable. In this case, sub prime lenders are ideal.
Sub prime mortgage lenders offer different forms of loans, such those for the self employed, for down payment assistance, for closing cost assistance and many other types that help an applicant achieve a 100% mortgage, approved with bad credit.
Often, these sub prime lenders are a better option simply because of their expertise. They also tend to charge above the general rates of interest, but are also known to offer better rates and terms than mortgage loan financed at 100% offered by the alternatives.
Advantages of Sub Prime Lenders
For first-time home buyers who may have no financial history, sub prime loans are perfectly suited. Unfortunately, a low credit score still means that the applicant cannot qualify for a prime rate, but the fact that the possibility of securing a 100% financed mortgage with good terms still exists does make up for that drawback.
The vast majority of traditional mortgage lenders expect applicants to have full-time employment for at least two years. With sub prime lenders, the condition is half that for an applicant to qualify for a 100% mortgage approved with bad credit.
Of course, not all sub prime lenders approve mortgage loans financed at 100%. In such cases, an applicant will need to have access to a lump sum in order to make a down payment and cover the closing costs of purchasing the property.
Getting Mortgages Financed at 100%
If an applicant manages to acquire a mortgage broker, then that broker is well placed to find the right sub prime lender - ideally, one that will approve 100% financed mortgages with poor credit with good terms. In some situations though, the applicant can qualify for a 103% financing, so closing costs can also be accounted for.
Of course, a 100% mortgage approved with bad credit is one that requires no down payment. But no everyone can expect to secure one. This is because in order to qualify to get a mortgage loan financed at 100% the applicant must have a credit score of 580 or more. For anything above 100%, an applicant must have a FICO credit score of at least 600.
There are lenders who specialize in loans with bad credit and who even offer 100% mortgages approved with bad credit. These lenders have different ways in dealing with applicants with low credit scores, so as to off-set the risks that turn most lenders off the idea of approving them.
Applicants with low credit ratings are better off applying to lenders who specialize in the low credit financing because most traditional lenders would easily disregard them. And even worth those willing to accept bad credit applicants, the chances of securing mortgage loans financed at 100% are very slim indeed.
Approval with Bad Credit
Applying for a mortgage is not difficult as long as the applicant can find the right lender to apply to. Many applications gain approval if the necessary criteria are met, but the lender must also be suitable. In this case, sub prime lenders are ideal.
Sub prime mortgage lenders offer different forms of loans, such those for the self employed, for down payment assistance, for closing cost assistance and many other types that help an applicant achieve a 100% mortgage, approved with bad credit.
Often, these sub prime lenders are a better option simply because of their expertise. They also tend to charge above the general rates of interest, but are also known to offer better rates and terms than mortgage loan financed at 100% offered by the alternatives.
Advantages of Sub Prime Lenders
For first-time home buyers who may have no financial history, sub prime loans are perfectly suited. Unfortunately, a low credit score still means that the applicant cannot qualify for a prime rate, but the fact that the possibility of securing a 100% financed mortgage with good terms still exists does make up for that drawback.
The vast majority of traditional mortgage lenders expect applicants to have full-time employment for at least two years. With sub prime lenders, the condition is half that for an applicant to qualify for a 100% mortgage approved with bad credit.
Of course, not all sub prime lenders approve mortgage loans financed at 100%. In such cases, an applicant will need to have access to a lump sum in order to make a down payment and cover the closing costs of purchasing the property.
Getting Mortgages Financed at 100%
If an applicant manages to acquire a mortgage broker, then that broker is well placed to find the right sub prime lender - ideally, one that will approve 100% financed mortgages with poor credit with good terms. In some situations though, the applicant can qualify for a 103% financing, so closing costs can also be accounted for.
Of course, a 100% mortgage approved with bad credit is one that requires no down payment. But no everyone can expect to secure one. This is because in order to qualify to get a mortgage loan financed at 100% the applicant must have a credit score of 580 or more. For anything above 100%, an applicant must have a FICO credit score of at least 600.
You may have bought your home with a finance company mortgage, or took out a second mortgage to pay for central heating or furniture. Your payments are probably very high because some finance companies charge interest rates of up to 50 per cent. It is advisable that you look carefully at the small print to find the true rate--most mortgage refinancing loans are over a fairly short term, about 15 years at most.
Smaller finance companies and credit brokers have been known to charge as much as 68 percent for interest. You may also find that you were charged a fee for the mortgage when you took it out (which could be 10 per cent of your loan) and that you are also paying interest on this fee. A finance company mortgage can land you in serious trouble, because the monthly costs are often higher than you think at the beginning. In addition, once you start missing your payments, arrears build up very quickly. If you try to pay back the whole loan, you may find that you owe far more than you originally borrowed.
Centralized lenders are finance companies which specialize in mortgages. They sell their loans through agents and they often lend to people who cannot get a loan from other lenders. Their interest rates are often higher. Giving mortgages is not the main business of insurance companies. Many of them will not grant first mortgages at all, or will consider them for only very expensive properties. They lend on endowment and pension mortgages. It is important to work out how much the mortgage will cost and whether you can afford the extra payments, so taking the affordability factor into account is very important.
Smaller finance companies and credit brokers have been known to charge as much as 68 percent for interest. You may also find that you were charged a fee for the mortgage when you took it out (which could be 10 per cent of your loan) and that you are also paying interest on this fee. A finance company mortgage can land you in serious trouble, because the monthly costs are often higher than you think at the beginning. In addition, once you start missing your payments, arrears build up very quickly. If you try to pay back the whole loan, you may find that you owe far more than you originally borrowed.
Centralized lenders are finance companies which specialize in mortgages. They sell their loans through agents and they often lend to people who cannot get a loan from other lenders. Their interest rates are often higher. Giving mortgages is not the main business of insurance companies. Many of them will not grant first mortgages at all, or will consider them for only very expensive properties. They lend on endowment and pension mortgages. It is important to work out how much the mortgage will cost and whether you can afford the extra payments, so taking the affordability factor into account is very important.
Today's financial market is one of the most difficult markets to navigate since the depression. Many questions about where to turn for advice and how to find the best financial products without sacrificing security abound. Reverse mortgages hold promise as a safe and secure tool, but many seniors have questions about what mortgages and the myths surrounding them. Questions include: How do they work? What do you give up if anything? And, how does the retention of home ownership work?
To start, let's cover the basics and history of a reverse mortgage. The term came from early products in the 1980's where the lender made payments to the borrower rather than the borrower making payments to the lender. As a result the product was named the "reverse mortgage". These reverse mortgages often had significant downsides. Once the borrowers passed away the home became the property of the bank who lent the money, and at times terms applied where the borrower could be displaced from the home if they lived too long. Interest rates were typically adjustable with no fixed rate options available. Closing costs were often very high as well. In the 1990's FHA, seeing great potential for the product, got involved and new rules were implemented allowing the borrower to pass on the home equity to their heirs, a guarantee to never be displaced from the home regardless of how long they lived, protection from home value volatility and much more. As a result, today's reverse mortgages are a great option with very few drawbacks.
So how does the reverse mortgage work? A reverse mortgage is similar to a standard mortgage in that it is a loan that is secured by real property, namely the home. The big difference is that there are no mortgage payment requirements on the mortgage. How is this accomplished? The reverse mortgage requires that you have equity in your home and that you are at least 62 years old. As a result a calculation is made to determine the amount of equity that can be lent by looking at the age of the borrower, the interest rate charged and the location of the home. This tells FHA and the lender how much they can safely lend without ever collecting a mortgage payment. As a result the lender can lend with minimal risk, but must wait to make their interest until the homeowner either chooses to move or passes away. Foreclosing is rarely an issue- only in cases where the homeowner does not follow the terms of the loan such as not living in the home, not keeping the condition of the home to reasonable standards or not paying the property taxes and homeowners insurance. This makes a loan that is very appealing to the lender who simply wants to earn interest on a low risk loan.
So where does FHA come into play? FHA had an impact on the reverse mortgage industry when it started insuring the lenders against losses in exchange for certain benefits to the homeowner. This helped reduce interest rates and eliminated most of the big drawbacks of doing a reverse mortgage. If the lender issues an FHA reverse mortgage they are insured against losses should the balance of the mortgage be higher than the value of the home when the homeowner's passes away. Further, the same FHA insurance leaves the borrower the ability to leave the home equity to their heirs- and in most cases there is equity left for the heirs. Today's FHA insured reverse mortgages are referred to as HECM loans, or home equity conversion mortgage.
The benefits of today's reverse mortgages include the ability to live in the home payment free, to receive money from the reverse mortgage to do home improvements, pay off debts or other mortgages, get protection from housing volatility, and get funds that are not taxable (full article). Money received from a reverse mortgage is not taxed because it is not income, it is in fact loan proceeds just as getting cash from a mortgage refinance. The money does not affect Medicare or Social Security income as a result, but can have an impact on Medicaid for those receiving that assistance. Current reverse mortgage have many option types available, including fixed rate options, equity lines where you use money only as needed much like using a credit card- but without any payment requirements, and options for having monthly payments sent to you, or having a lump sum of cash given to you at the loan settlement.
Because of the issues from reverse mortgages of the past, many myths about reverse mortgages abound, and are often spread by financial consultants, radio personalities, close friends and relatives and even mortgage professionals who are not experts on reverse mortgages. We have included a full section on reverse mortgage myths to help clarify these myths and what the real facts are.
The myths include, but are not limited to the following beliefs:
- The bank will own the home when I pass away or move.
- My kids will not inherit the home equity.
- I cannot purchase a home with a reverse mortgage
- Reverse Mortgages are all adjustable rates.
- My kids will have to pay the lender if the mortgage balance is higher than the home value when I pass away.
- I cannot do a reverse mortgage if I currently have a mortgage on my home.
- Closing costs are extremely high
- I will be forced to move from my home if I live too long.
There are many benefits to reverse mortgages, and a few drawbacks. We encourage you to get complete information from a reverse mortgage professional prior to making a decision on getting a reverse mortgage. For more information feel free to visit my site.
To start, let's cover the basics and history of a reverse mortgage. The term came from early products in the 1980's where the lender made payments to the borrower rather than the borrower making payments to the lender. As a result the product was named the "reverse mortgage". These reverse mortgages often had significant downsides. Once the borrowers passed away the home became the property of the bank who lent the money, and at times terms applied where the borrower could be displaced from the home if they lived too long. Interest rates were typically adjustable with no fixed rate options available. Closing costs were often very high as well. In the 1990's FHA, seeing great potential for the product, got involved and new rules were implemented allowing the borrower to pass on the home equity to their heirs, a guarantee to never be displaced from the home regardless of how long they lived, protection from home value volatility and much more. As a result, today's reverse mortgages are a great option with very few drawbacks.
So how does the reverse mortgage work? A reverse mortgage is similar to a standard mortgage in that it is a loan that is secured by real property, namely the home. The big difference is that there are no mortgage payment requirements on the mortgage. How is this accomplished? The reverse mortgage requires that you have equity in your home and that you are at least 62 years old. As a result a calculation is made to determine the amount of equity that can be lent by looking at the age of the borrower, the interest rate charged and the location of the home. This tells FHA and the lender how much they can safely lend without ever collecting a mortgage payment. As a result the lender can lend with minimal risk, but must wait to make their interest until the homeowner either chooses to move or passes away. Foreclosing is rarely an issue- only in cases where the homeowner does not follow the terms of the loan such as not living in the home, not keeping the condition of the home to reasonable standards or not paying the property taxes and homeowners insurance. This makes a loan that is very appealing to the lender who simply wants to earn interest on a low risk loan.
So where does FHA come into play? FHA had an impact on the reverse mortgage industry when it started insuring the lenders against losses in exchange for certain benefits to the homeowner. This helped reduce interest rates and eliminated most of the big drawbacks of doing a reverse mortgage. If the lender issues an FHA reverse mortgage they are insured against losses should the balance of the mortgage be higher than the value of the home when the homeowner's passes away. Further, the same FHA insurance leaves the borrower the ability to leave the home equity to their heirs- and in most cases there is equity left for the heirs. Today's FHA insured reverse mortgages are referred to as HECM loans, or home equity conversion mortgage.
The benefits of today's reverse mortgages include the ability to live in the home payment free, to receive money from the reverse mortgage to do home improvements, pay off debts or other mortgages, get protection from housing volatility, and get funds that are not taxable (full article). Money received from a reverse mortgage is not taxed because it is not income, it is in fact loan proceeds just as getting cash from a mortgage refinance. The money does not affect Medicare or Social Security income as a result, but can have an impact on Medicaid for those receiving that assistance. Current reverse mortgage have many option types available, including fixed rate options, equity lines where you use money only as needed much like using a credit card- but without any payment requirements, and options for having monthly payments sent to you, or having a lump sum of cash given to you at the loan settlement.
Because of the issues from reverse mortgages of the past, many myths about reverse mortgages abound, and are often spread by financial consultants, radio personalities, close friends and relatives and even mortgage professionals who are not experts on reverse mortgages. We have included a full section on reverse mortgage myths to help clarify these myths and what the real facts are.
The myths include, but are not limited to the following beliefs:
- The bank will own the home when I pass away or move.
- My kids will not inherit the home equity.
- I cannot purchase a home with a reverse mortgage
- Reverse Mortgages are all adjustable rates.
- My kids will have to pay the lender if the mortgage balance is higher than the home value when I pass away.
- I cannot do a reverse mortgage if I currently have a mortgage on my home.
- Closing costs are extremely high
- I will be forced to move from my home if I live too long.
There are many benefits to reverse mortgages, and a few drawbacks. We encourage you to get complete information from a reverse mortgage professional prior to making a decision on getting a reverse mortgage. For more information feel free to visit my site.