Reverse mortgages are seen as a way for seniors to tap into their current homes as a source of income. By drawing from the equity they already have, they can pay off bills, make improvements to their current residence, or even take a well-earned vacation. There is one option that most do not even consider: using a reverse mortgage for the purchase of a newer property.
Understanding a Home Equity Conversion Mortgage in Holtsville NY
In order to see how using a reverse mortgage for purchase of a newer property works, you first must understand the Home Equity Conversion Mortgage (HECM). The HECM is still relatively new, but it provides a way for those who are 62 years or older to borrow against the value of the home. With approval, the borrower gains access to funds without having to make monthly payments. Repayment of the loan does not occur until the borrower either passes away or sells the property.
This loan is not an option for everyone. In fact, the guidelines stipulate a minimum age of 62 years old. The borrower must also either own their home outright or have a large amount of equity built up.
Using Reverse Mortgage for Purchase
For some older Americans, the idea of living closer to family members is ideal, but they do not necessarily want to give up their existing home. If this is the case, they may apply for a reverse mortgage. The borrower must occupy this second home for a set portion of the calendar, and the original residence, which the loan is against, must be the borrower’s primary residence.
When using a reverse mortgage for purchase, there are some limitations. For example, this type of loan only covers 47 to 52 percent of the purchase price. It is the borrower’s responsibility to make up the difference. This money can come from a retirement account, savings, or a gift. The actual amount borrowed depends on the age of the youngest borrower, current interest rate, mortgage insurance premium, and the home’s value at appraisal.
Additionally, only certain types of residences qualify for a reverse mortgage. These include single-family homes and two to four unit homes where the borrower occupies one of the units. For condominiums, the U.S. Department of Housing and Urban Development requires preapproval. In addition, manufactured homes must also have FHA preapproval. The borrower must also obtain a certificate of occupancy for any new construction.
A reverse mortgage is a great way for seniors to get a second home closer to family. As with a traditional HECM, there are no monthly payments due. A single, balloon payment, is due at the sale of the home, when the last borrower moves out or passes away. This payment is a total of the principle plus interest. If the home sells for more than this amount, the borrower, heirs, or the estate retains the remaining equity. Should the home appraise and sell for less than the amount owed, there is a guarantee of no personal liability. Lenders are insured against this type of loss.
Many seniors can greatly benefit from getting a reverse mortgage but many are worried about the charges made against the loan by lenders. Here is a rough breakdown of what to expect.
Just like getting a forward mortgage loan or home equity refinancing, you can expect to pay similar costs when you apply for a reverse mortgage. You will have to pay an origination fee, an up-front mortgage insurance premium for the FHA Home Equity Conversion Mortgage (HECM), an appraisal fee, and certain other closing costs.
These fees and charges can add significantly to the cost of borrowing against the equity in your home, but the good news is that many of the fees are capped. Here’s a breakdown of what you can expect to pay although certain programs may be more or less expensive than the fees listed.
This is what the local lender or broker will charge you in order to cover his expenses and make a large part of his profit on the deal. If you’re applying for a HECM reverse mortgage – and more than 90% of people do – the origination fee is equal to the greater of $2,000 or 2 percent of the maximum claim amount. Currently the maximum FHA loan amount varies between $200,160 and $362,790, therefore, the 2 percent origination fee generally lies between $4,003 (2 percent of $200,160) and $7,256 (2 percent of $362,790).
With a Home Keepers program, the originator is capped at charging 2% of the value of the home.
Proprietary programs have no such cappings and can charge whatever they want. Some do away with many of the upfront charges such as the origination fee but you can rest assured they get this money in other ways.
Mortgage Insurance Premium
Under the HECM program, the loan is made in conjunction with a FHA insurance plan that equates to 2% percent of the maximum claim amount, or home value, whichever is less, plus an annual premium equal to 0.5 percent of the loan balance.
This is pretty standard when borrowing money against a home. The lender appoints an appraiser to survey the home to ascertain its value. The appraiser will also make sure there are no major structural defects. Any defects must be first fixed at the homeowners expense and a second inspection is then required. The original inspection usually costs around $400.
A Credit Report fee costing around $20 that verifies any federal tax liens, or other judgments, handed down against the borrower.
Flood certification fee costing around $20.
A title search costing between $150 and $450.
Document preparation fees costing around $100.
Insurance that protects the lender (lender’s policy) or the buyer (owner’s policy) against any loss arising from disputes over ownership of a property. The cost is directly related to the amount borrowed.
Pest inspection e.g. termites. Costs around $100.
A survey to determine official boundaries. Costs around $250.
Service Fee Set-Aside in Holtsville NY
This is the amount of money that is set aside to cover the projected costs of servicing the borrower’s account. This fee can be between $30 and $35 and is largely determined by the borrower’s age. This cost can run into thousands of dollars.
The above is just an outline of what you can expect to pay a reverse mortgage lender. However, charges do vary from lender to lender, program to program, so be sure to ask the lender to give you the exact costs. If you don’t understand what you’re being told, you should seek advice from an independent financial advisor.
These days, retirement lasts longer than ever before before. While our parents’ generation might have spent 8 to 10 years relaxing on the front porch, today’s retirees are enjoying retired life for 20 years additional.
How much money do wish to to save to send the kids to State College, when compared to Ivy League? What amount would it cost for that house you need, compared to house you yearn?
(1) Loans from friends or family. These loans, while low interest, can be eating away at the relationship, without you even knowing this kind of. They may reduce the relationship to a formal, strained, money-based transaction, instead connected with a loving, friendly, supportive my. You may know the debt is often a problem, or ask other relatives to see if the debt is a condition in culture within the family – if so, pay it off quick.
Proprietary programs have no such cappings and can charge whatever would like. Some part with many within the upfront charges such being the origination fee but you can rest assured they that money various other ways.
A large amount of times your heirs might imagine they’ve a right towards the property upon your passing. They might feel that the reverse mortgage keeps them from acquiring it and are discouraging you from proceeding.
Reverse mortgages come using a hefty quantity of fees, so. These include an origination fee, closing costs, mortgage insurance premium, and servicing fees. Should finance these through your loan as efficiently. They’ll simply take them out of the lump sum, or credit line – so you have less make use of of what you’ve obtained.
As our parents age category they may start to lose mental capacity or these kinds of simply unaware of the consequences of their decisions. You have to talk these while technique still make rational judgements. Yes, their decisions may negatively impact our inheritance. Yes, one men and women greatest fears is which our folks will run from your money and we’ll really should try to assist one. Unless you already know your folks finances this may be a conversation that you should have an individual may regret the effect.