If a person needs cash and they own a home, one option may be to tap into the equity of their home. Under a traditional mortgage a borrower receives the full amount of the loan at closing and repayment of the principal plus interest starts immediately. With a home equity loan a credit line is established secured by the house. Monies are borrowed as needed, up to the amount of the credit line, and repayment of principal plus interest starts immediately. Like a home equity loan, under a reverse mortgage, a credit line is established secured by the house and monies are borrowed – as needed by writing a check – up to the amount of the credit line. However, repayment does not need to begin immediately, and unpaid interest can be added to principal.
Borrowers must therefore be very cautious with reverse mortgages because when unpaid interest is added to the unpaid principal the total debt can grow very quickly exhausting the credit line. Also, reverse mortgages must be paid off upon death of the home owner. But despite these and other drawbacks, sometimes a reverse mortgage is the only/best option to free up cash.
Here are a few wrinkles to keep in mind. In order to obtain a reverse mortgage, the applicant must be over 62 years of age and the property being mortgaged must be their primary residence. Generally, any existing mortgage or home equity loans on the property must be paid off or refinanced when the reverse mortgage is put in place. If the property was transferred to a trust for estate planning or other purposes prior to the reverse mortgage, then the terms of the Trust Agreement must permit the placing of a mortgage on the property, the lender must approve the use of the money under the trust terms, and the Trustee must also abide by lender rules.
While a reverse mortgage can be put in place quickly and fairly simply, generally when the owner passes away the loan is due and payable within six months. Six months passes all too quickly when a house must be sold to pay the debt and/or there are family issues to be resolved. If the loan is not paid off in full, the Lender may increase the interest rate, foreclose the property to collect, and charge legal fees – all radically increasing the borrowing costs.
The Reverse Mortgage Process:
• The owner will make a mortgage application to the Lender.
• If the property is owned by a Trust, the Trust must be submitted for lender review.
• The lender will conduct a competency interview of the Owner.
• The lender will evaluate the owner’s income, assets, and credit.
• The lender review the insurance, taxes, and maintenance for the property.
• The lender will obtain an appraisal of the property.
• From beginning to end the process is approximately 30-60 days.
The Cost of a Reverse Mortgage:
• Interest rates on reverse mortgage are, currently, approximately 4.5% per year.
• Closing costs on a $600,000 reverse mortgage often include mortgage insurance $12,000, origination fee $6,000, all other costs $4,000 – generally paid from loan proceeds – at closing.