One of the great milestones in life is retirement. People who chose to own rather than rent have something to help as they look forward to retirement. All those monthly payments made on the mortgage means that they have been getting a larger and larger equity position in their home. The question is, how can they benefit from this equity without losing the roof over their heads. One possible solution is to get another mortgage if the house is paid off or to refinance the current mortgage. Both of these options allow you to cash out the equity in your home.
The problem is, both these options require monthly payments. So the money you have withdrawn needs to be used to cover your daily living expenses and your mortgage obligation. This burden will deplete your funds faster than you might think.
A different approach has you selling the home, buying a smaller one and using the remaining proceeds of the sale to live. This begs the question, how small of a home do you need to buy to have enough to live on?
The Past Approach
As more and more of the population ages, the FHA has taken over a mortgage product intended to help people facing these problems. When first introduced to the United States, reverse mortgages were portfolio loans made by private parties who wrote their own rules. Borrowers often did not understand what they were getting into and would later discover that they had to give up their homes because they could not pay off the loan when it became due. This created a very bad reputation for the reverse mortgage.
The New Approach
More recently, the FHA has created guidelines for reverse mortgages that when followed, means that the FHA insures them and the loans can be sold on the secondary market. The secondary market being a discussion well beyond this article, let’s focus on what an FHA-insured reverse mortgage means for you.
The Benefits
- You will only have to pay your property taxes, insurance and home owner’s association dues (if any).
- You do not need to show any income to qualify, just be 62 or older.
- Your credit score and credit history do not matter.
- You can not be asked to repay the loan until you turn 150.
- You will have to live there as your primary residence, so if you need hospital care make sure it is for less than 365 continuous days or arrange to transfer your hospital care to in-home care during your 12th month.
- You will have to live in your home so no turning it into a rental property, even if you are away for an extended period such as being in hospital.
The Tradeoffs
In return for these benefits, you agree to pay the items listed in the first bullet point of the benefits (above) but will not be required to pay a penny in interest or principle on the loan ever!
When you pass away, the home will be sold to pay off the loan or your heir(s) can choose to payoff the lien and keep the home.
Any money left over after selling the house and paying off the reverse mortgage will go to your heirs.
If the sale of the house is insufficient to pay off the loan, the FHA will take care of the difference and none of your heirs will be required to pay a penny.
There are a host of requirement and restrictions on this loan and its proceeds so you will need to discuss this in detail to understand how to take full advantage. As an example, you must be at least 62 years of age to qualify for the loan. The down payment required will decline each year, starting at 62 years of age. If you delay taking the loan, the down payment needed declines each year until it reaches 25%.
There are many more aspects to discuss as well as the options you will have once you have applied for the reverse mortgage. Call/text me at 760 622 5087 or e-mail me to discuss both the reverse mortgage and the possibilities this mortgage opens up for you. You will be amazed at the possibilities.
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