Understanding a Reverse Mortgage

You have probably seen one or more television commercials about reverse mortgages. These promise an opportunity to get access to the equity in your home, tax-free, without having to make monthly payments on your loan.

It’s easy to see how anyone could be tempted into getting a reverse mortgage. After all, the money you access can be used to take your dream vacation, renovate or make other much-wanted purchases. But how old do you have to be to qualify, what are the other requirements, and how do you apply for a reverse mortgage?

Reverse Mortgage Requirements

First of all, you must be 62 years of age or older and the home you are in must be your primary residence. Secondly, your primary residence must be one of the following types:

–          Approved condominium unit

–          Single family home

–          Townhouse

–          An owner-occupied home having two to four units

–          An approved manufactured home

In addition to the above, you must attend a counseling session approved by HUD (Department of Housing and Urban Development), and you will be required to continue the payment of your homeowners insurance and property taxes.

Why Is Counseling Required?

Anyone considering a reverse mortgage will need to attend a counseling session, as mentioned above. This will allow your financial situation to be reviewed, and the counselor to check whether alternatives such as grants, downsizing or selling your home make more sense than getting a reverse mortgage.

If a reverse mortgage is feasible, your counselor will as you questions that will allow them to complete a budget analysis. You may be asked about your living expenses, debts and income. The important thing to keep in mind is that the law now requires all counselors to ask these questions of would-be borrowers.

Reverse Mortgage Features to Be Aware Of

While a reverse mortgage can free up the cash you need and allow you to enjoy your home’s equity while you are still able to do so, there are several things to be aware of.

The money you will owe on your reverse mortgage will increase over time. This is because your outstanding balance will incur interest, which will then be added to your monthly owing amount. Ultimately, this will mean that your total debt amount will increase.

It’s true that you will retain the title to your home in a reverse mortgage. But this also means that you remain responsible for all of the expenses included with home ownership, including property taxes, insurance and maintenance. Any neglect to these financial obligations could result in your loan becoming due.

A reverse mortgage will cause your home’s equity to be accessed, which could mean that your heirs are left with few assets. It is possible for your heirs to retain ownership of the home, but to do so, they will have to repay the loan in full, even if that balance exceeds the home’s value.

Be Aware of TALC Rates

TALC stands for Total Annual Loan Cost. These rates will illustrate how much a reverse mortgage will cost you every year on average.

Lenders are required by law to make it clear to you that the TALC rate is not the same as APR. Traditional mortgages allow homeowners to know how much is being borrowed up front. But in reverse mortgages, a homeowner won’t know what their balance is until the following has been determined:

  • How you choose to receive your money, i.e. in a line of credit, lump sum or monthly amount;
  • How long you plan to keep the loan;
  • How interest rates behave.

The TALC rate of a reverse mortgage will generally come in above that of an APR, and will include all the costs you pay, including interest, insurance and lender fees.

Other Tips to Consider

There are other financing options which may help you reach your financial goals for a lesser cost, but these will have to be researched. A closer look into jumbo reverse or FHA home equity conversion mortgages may also provide much-needed information for an informed decision. Choosing a reverse mortgage with the lowest TALC will also help you to pay less.

Guest author Sam Stieler writes on a variety of topics, but is very well-versed on the topic of home mortgages.  He is a frequent contributor at  http://www.home-mortgage-calculator.com/.  You can also find .

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