Understanding Reverse Mortgages

What is a reverse mortgage? A reverse mortgage, often called home equity conversion mortgage (HECM), allows seniors to turn the equity of their homes into cash. It’s essentially the same as a traditional mortgage, except that it doesn’t require you to pay back any money until you move out of your home or die – and even then, you still don’t have to pay it back. To learn more about how reverse mortgages work and how to apply for one, keep reading.

What Is A Reverse Mortgage?

If you’re reading this, you’ve probably heard of a reverse mortgage and are wondering what exactly it is. A reverse mortgage is essentially when you borrow money from your home through an FHA-approved lender (by way of HECM). With these loans, seniors can live freely and comfortably in their homes as they age. In exchange, borrowers pay back lenders with interest as well as give up equity in their homes.

Who Can Get One?

A reverse mortgage is an option for anyone 62 years or older that owns a home. But, depending on how much equity you have in your home, it may not be an option for everyone. Reverse mortgages are often best suited for those who own their homes outright—meaning there’s no mortgage balance left on their home—or those with just enough equity to cover other expenses without depleting all of their assets. If you plan on downsizing or don’t want any of your family members touching your estate, reverse mortgages can be an easy way to accomplish that goal.

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Application Process

You can apply online or at your local mortgage lender. Because reverse mortgages aren’t based on credit scores, most lenders want to speak with you in person or by phone to go over some basic information. Before going into any home buying or investing decisions, it’s a good idea to understand how your decisions will impact your financial well-being down the road. While it’s typically possible, many reverse mortgage applicants are turned away because of their lack of understanding about how their actions today could affect them tomorrow. Make sure you ask questions about anything that seems unclear and if you don’t understand what you read—or what is said—get help from someone who does.

Impact on your credit score

When applying for a reverse mortgage, you’ll be required to list all current mortgages on your home, as well as any other loans you have. A lender will use your credit score and credit history to determine whether or not you qualify; if you have lots of debt or unpaid bills, it can hurt your chances of getting approved. Many seniors are currently struggling to pay off debts, however, a reverse mortgage can help in such situations. So, if you’re thinking about getting a reverse mortgage—and especially if it’s likely that you’ll end up with more debt in retirement than when you are currently—do as much financial clean-up as possible before applying so that your loan application is accepted more quickly, and you can proceed to pay off debts efficiently.

Fees & Costs

A reverse mortgage is an appealing concept—you can convert some of your home equity into cash. But be aware that these loans have big fees and interest rates, so you could lose a significant chunk of your home’s value if you don’t use them responsibly. The Consumer Financial Protection Bureau says most borrowers lose more than 40% of their equity in fees alone. If you apply for a reverse mortgage, take time to understand all that goes into it—and talk with other seniors who have taken one out before you make any final decisions.

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Choosing The Right Lender

When you decide that it’s time to apply for a reverse mortgage, you want to make sure that you’re working with a licensed lender and get approved from one of several government-approved lenders. An important consideration here is location: Although most lenders work across state lines, some do not. That can be problematic if you live in one state but prefer to work with a lender in another. Another consideration is qualification: Your income and age play an important role in determining whether or not you qualify for a reverse mortgage—and how much money you might receive. Make sure you find out what your income and age eligibility are before selecting your lender so that they can better help meet your needs.

Deciding to take a reverse mortgage can be a big decision for many senior homeowners, but, when one has enough information and fully comprehends future implications it can definitely be the right choice. While it may not be the best answer to all senior problems, it can definitely support some. The most important factor in the decision making is to understand the terms of a reverse mortgage, the value of one’s home, and how that value will decrease. Finally, seniors must acknowledge that getting a reverse mortgage can mean that eventually this home will not be part of their legacy and come to terms with it.

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