Retirement & Reverse Mortgages
You may have previously heard about reverse mortgages and retirement is just around the corner.
You never would have imagined that you’ll still be carrying a mortgage when that big day rolled around.
However, if you still owe on your home, there are still three strategies that you can use to speed up your payment plan.
You may be able to shave months or perhaps years off your loan and save a ton of interest.
Three Methods to kick off retirement mortgage free:
1.Inject a lump sum:
Say you come into some money, whether it is an inheritance, bonus, tax refund or even winning the lottery.
Put it toward your mortgage and you’ll not only shrink your balance but trim your months to payoff and also pay a lot less in mortgage interest.
2.Add extra annually:
Perhaps you do not have a windfall but can afford one extra payment a year. You will still be able to scoop up some savings. If you cannot do it all at once, try this: divide your monthly bill by twelve and add that amount to your regular mortgage payment every month. It’s just like making 13 payments each year.
3.Chip in each month:
One of the simplest ways to accelerate the process is to pay a little bit extra every month. This does not place a heavy strain on your finances, yet it’s worth the effort because a small amount over time adds up the most.
* Make sure your lender accepts extra payments without charging penalties and double check that the additional money will go to principal, so you are not paying off interest first.
*Dump your PMI and save cash: Do not get so caught up in slashing your mortgage that you forget a hidden windfall:
Private Mortgage Insurance (PMI) is usually required when you make a down payment of less than 20 percent of your home’s purchase price.
However, once the principal balance of your mortgage is 80% of this original value, you can ask your lender to drop PMI.
For a $150,000 mortgage, that can put up $1,500 a year back into your pocket.
Reverse Mortgage Reform-new changes reduce financial risk:
Many people are unwilling to touch a reverse mortgage, thanks in part to a series of misleading advertisements that only confused viewers. After seniors watched the ads, they were still surprised to learn that reverse mortgages:
- Are essentially loans that must be repaid with interest.
- Do not let you off the hook from paying property taxes.
- Do not guarantee that you will never lose your home.
- Can put your retirement security at risk if not managed carefully.
- Are not all affiliated with the government.
The concept is pretty straightforward.
If you are a homeowner, age 62 older, you can tap into your home equity for cash.
How much you get is based on either how much equity you have or the sale value of your house.
You can receive the cash as a monthly payment, a line of credit, or a lump sum.
You still get to live in your house, while using the money to cover bills, healthcare expenses and more.
When you die, sell the house, move or no longer meet the requirements, you or your heirs must pay the loan back with interest.
It sounds pretty great. So what’s the problem?
Basically, fail to dig into the fine print and you could wind up in serious financial trouble. Among other complications, you might lose your home if:
- You are a surviving spouse not on the loan.
- You fall behind paying property taxes or insurance.
- You can no longer perform basic home maintenance.
While all that is scary stuff, financial experts say it’s now time to reconsider this common retirement strategy.
It’s undergone a makeover in the past few years and new policies mean less financial risk.
Moving forward-in reverse:
Only one type of reverse mortgage is federally insured-the home equity conversion mortgage (HECM).
This is only available through a lender approved by the Federal Housing Administration (FHA).
Unlike other loans, HECM comes with more security. Suppose the housing market runs dry.
Even if the loan amount is more than the value of your home, Uncle Sam will cover the cost.
Plus, HECM’s usually carry a lower interest rate that privately sponsored reverse mortgages.
Recent changes signal new benefits:
Not only has the FHA cracked down on deceptive advertising but they have set new rules that mean less risk and more savings:
Tighter withdrawal limits: As a borrower, you can’t take out as much money through a reverse mortgage in the first year. This encourages you to spread out your equity rather than blowing it all at once.
Stricter financial qualifications: Before your loan is processed, lenders will scrutinize your finances. They want to be sure that you will be able to keep up with home insurance, property taxes and maintenance expenses in the long run.
Better protection for spouses: In contrast to previous years, even if your name is not on the reverse mortgage, you may be able to stay in the home as long as you meet certain requirements.
New set-aside accounts: You can work with lenders to set aside part of your home equity in advance. This may give you peace of mind about paying your insurance and other future bills Talk to a qualified advisor before you commit: Still, reverse mortgages are not right for everyone. Before your application is processed, you ought to receive counseling. Take advantage of this opportunity to discuss the financial risks of a HECM as well as other alternatives. The FHA funds counseling agencies throughout the country that can provide information to you for free or a low cost. Contact an agency to find a counselor near you.
According to a CBS MoneyWatch , the following represents the best reverse mortgage deals:
Choose a Home Equity Conversion Mortgage (HECM).For most borrowers, it’s the right loan.
Compare the HECM with one of the jumbo loans if you have an expensive house. Sometimes the jumbo wins. Often, however, you’ll find that the HECM gives you all the cash you need, while saving you thousands of dollars in costs.
Look beyond the upfront cash the lender offers.A jumbo lender might provide a higher credit line at the start. But because the credit line grows every year, HECM will probably provide you with much more money in the end. Your HECM counselor can help you figure this out.
The most expensive way to borrow is by taking a lump sum up front. You pay interest and fees on the whole amount, even though you intend to use only part of the money each month. Fixed monthly payments aren’t much better because your income won’t rise with inflation. The best option is taking the loan in the form of a credit line. That way, you can draw money as needed and will be charged interest only on the amounts you actually use. What’s more, a HECM credit line rises every year, so your borrowing power — and future income — will go up.
Reverse mortgages carry all the fees of regular mortgages and then some.You might pay $15,000 to $20,000 up front.
Most of these loans charge variable interest rates, adjusted annually.HECM gives you three choices:
A loan with a rate that adjusts monthly. You get higher monthly payments and a lower initial interest rate than on the alternative choices. Over the life of the loan, however, the rate can rise by up to 10 percentage points.
A loan whose rate adjusts annually. You get smaller payments and a higher initial interest rate. The rate can rise by up to 2 points per year and 5 points over the life of the loan.
A loan with a rate that never changes but there’s a catch. You have to take the whole amount as a lump sum.
Finding the lowest-cost loan is tricky.Normal comparisons of rates and fees don’t work. Reverse lenders are required to calculate a Total Annual Loan Cost, or TALC rate, based on all projected costs. The TALC rate is far from a perfect disclosure but it lets you compare two loans in a reasonable way. Always ask for the TALC rate.
You can get a better, more customized cost estimates from a good reverse mortgage counselor.
The counselor should be working with special computer software developed for this purpose by the AARP.
The program lets you enter specific interest rates, possible rates of home appreciation and the rate at which you’ll draw money from your credit line.
That shows you how the costs of the various loans change over time.
- If your home rises substantially in value or interest rates drop, you might want to refinance your reverse mortgage.You’ll pay the closing costs all over again, so ask the mortgage counselor to show you, in real numbers, all the pros and cons.
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