4 Important Things to Consider Before Using a Reverse Mortgage Loan
by Sumona Loans & Credit 21 April 2023
After retirement, the income people receive each month decreases for the majority of them. However, the expenses, particularly for health care, may not keep pace. Many people wonder what is the best way to replace their monthly income once they retire.
So, naturally, you can apply for Social Security retirement benefits, but make sure you pick the right time to claim it. You can try and apply for such benefits once you turn 62, but keep in mind that in this case your monthly benefits will be reduced by 30% until you reach your full retirement age. Additionally, you can postpone your claim until you are 70 to receive your maximum monthly benefit.
With this in mind, some financial professionals are recommending that older homeowners consider borrowing a reverse mortgage loan in order to postpone collecting Social Security benefits. Applying for a reverse mortgage means that you have already reached the age of 62 and paid off your home mortgage, and now you have the chance to borrow a part of your home proprietorship as tax-free income.
Homeowners who pick this type of mortgage cannot move or sell the property until they repay the loan. For those that have low incomes each month and want to enjoy retirement in their own home, this can be a great opportunity to receive extra cash to repair their property or get the right medical care.
If you’re considering getting a reverse mortgage, continue reading and learn four very important things before you start the process.
How does a reverse mortgage work?
A reverse mortgage loan allows homeowners to borrow money while using their home as a guarantee. When you obtain this type of mortgage loan, the title to your property stays in your name, just as it would with a traditional mortgage. However, compared to a traditional mortgage, homeowners with this type of loan do not make mortgage payments every month.
Also, any interest accrued during this process is rolled into what has already been borrowed, so there will be no out-of-pocket expenses. All proceeds remain yours while title ownership is maintained. When the repayment on the reverse mortgage loan is due, it will reach its maximum amount because unpaid interest adds to the principal loan balance, which then becomes payable when your tenure ends.
The reverse mortgage fees are expensive
When compared to other forms of borrowing against your home equity, the costs of obtaining a reverse mortgage can be quite high. Borrowers must pay an origination fee, a one-time upfront insurance payment also known as Initial Mortgage Insurance Premium (IMIP), annual insurance premium (MIP), loan servicing fees, and interest.
The federal government limits the fees the lender is allowed to charge. For example, the origination fee is limited to $6,000, so anything above this amount won’t be allowed by law.
Some lenders employ high-pressure sales techniques
The first thing you should know is that reverse mortgages are known for attracting predatory lenders and practices. Some seniors have been subjected to high-pressure sales tactics when it comes to reverse mortgages. You should be very cautious if the lender offers you recommendations regarding how to use the funds from your reverse mortgage, particularly if they propose investing it in unknown things.
This doesn’t mean that applying for a reverse mortgage is a bad idea. In fact, a reverse mortgage can be a good way for many people to provide themselves with a regular, dependable income in retirement. Just be certain that you fully understand all of the complexities of the mortgage you possess.
Reverse mortgage credit score requirements
Once you apply for a reverse mortgage, the lender will review your credit history and make sure you can comply with all loan commissions. This not only includes your property taxes and homeowners insurance premiums but also any applicable homeowner association fees. To get a sense of your overall financial situation, they may pull your credit report and look for potential overdue accounts. If there are any late payments, the lender will consider the seriousness of the situation when making their decision.
Before applying for a reverse mortgage, your age, home equity, and ongoing interest rates are taken into account. In addition to this information, before making a decision, lenders will search for other income sources you may have like pensions, Social Security benefits, or investments. Before applying, review your credit report to ensure accuracy on the lender’s part.
Overall, the lack of a minimum credit score is good news for anyone considering a reverse mortgage. For the lender, the most important thing is that you can accomplish your mortgage payments. This includes paying property taxes and ensuring that you take care of your home. The lender ultimately wants to see that you will honor your contract and uphold your responsibilities as a homeowner. So, make a clear retirement plan and start looking for options to obtain a secure monthly income.