In today's financial complexities, most of the senior Americans face complications when they retire. One recent statistics revealed, one-third of retired people are living on Social Security income. There is another source of income which helps some of the fortunate people with self-owned home. It is noted as reverse mortgage & works as a additional income source along with social security & other income sources.
Reverse mortgage is a simple way of using your home's equity to create a continuous source of income. It is a safe home finance program which will secure your property from being sold to a third party. But before you choose reverse mortgage as a revenue generating option, you'll need to understand certain crucial facts that every senior citizen should know.
Opting different payment option – Reverse mortgage offers various payment options to en-cash your home equity. The FHA (Federal Housing Administration) provides 5 different plans for reverse mortgage. The first one includes equal monthly payments which the borrower will receive until he or she dies. The borrower may also choose the fixed-term equal monthly payment option. The second one involves a flexible line of credit which will provide you the option to draw money as per your choice & time. Apart from these options, you can also avail a combination of payment plans which will have the characteristics of line of credit plan & any of the other two discussed above. The above given payments plans not only manages your financial requirements but also give you a security from sudden financial crisis.
Getting a part of the home equity – Reverse mortgage can not provide you the chance to utilize your full home equity. FHA will only provide a maximum amount of money as mortgage after specific calculations of current rate of interest, appraised value of the house & the age of the youngest borrower.
Reverse mortgage will also include some costs which you have to pay within a certain period or some lenders might deduct it as loan amount from your net home equity. These costs may include the 3rd-party lender costs, mortgage insurance premiums, origination fees, servicing & misc charges etc.
Losing the home – While offering good financial security to the senior homeowners, reverse mortgage may also be the sole reason for losing their home. Some greedy lenders may assure you that retirees can't lose their precious house due to reverse mortgage. But this is a wrong statement, if you do not keep an eye on this matter, the consequences might be much severe.
As stated earlier, the reverse mortgage borrowers have responsibilities in form of paying down some essential costs. These cost may be divided into several payments like - real-estate taxes, homeowners insurance, flood insurance premiums, utility bills etc. The mortgage lender always asks the borrower to maintain these responsibilities properly. Being a retired senior person, if you do not entertain these responsibilities, the lender may take serious legal steps like filing the foreclosure. Through a special report, it was revealed to the FHA that seventy percent of the borrower has taken line of credit plan & taken out a very lump sum amount inspite of using the “tenure” monthly installment plan. These borrowers may spend all their cash very quickly & find themselves into a jeopardy.
No. of listing as borrower – In a reverse mortgage process, you can add more than one senior owner as the borrower. It is recently found that families who added only one senior owner in the reverse mortgage program, have suffered from many difficulties due to the lending terms. It is right that selection of the oldest member as borrower will boost up the amount of monthly payments. But if the person don't add the name of his/her spouse in the reverse mortgage agreement, the “rights of living in the house till death” will be named only to that person who is listed in the loan document as borrower. The situation will get complicated if the main borrower dies or gets hospitalized for a long time. Then according to the agreement, the lender might have to initiate foreclosure whereas the other family members have to vacant the property.
Untrusted lenders – In recent scenario, property values are falling day by day & on the other hand reverse mortgage oriented complaints are increasing simultaneously. These two issues are insisting many lenders including MetLife (MET), Wells Fargo (WFC) and Bank of America (BAC) to back off from lending money. Many new, small mortgage lenders have captured their territory & started to engage in lending. Among them, few are trustworthy & reputable but the other group of lenders might not be the same. If you take out a loan from this type of lenders, they might set a trap for you. The mortgage terms may get quite high & it will create difficulties even for you to maintain your home under reverse mortgage. Consequently you will have no other option than foreclosure.
Reverse mortgage can be very helpful for the retired senior persons as a way of additional income. Apart from the income through other sources, financing from reverse mortgage can also aid you to met several expenses. But it is true that if you do not shop for a good deal or check the terms & conditions properly, reverse mortgage program can also put your dream home at a risk along with your financial stability.