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How does a senior reverse mortgage help after retirement

Reverse mortgages are home equity loans which are used as the last source of income or as a retirement planning tool. These mortgages can also be used to repay existing mortgages as well as to buy a new house. Older homeowners above the age of 62 years are eligible for reverse mortgages. The homeowner retains the ownership of the house and there are no monthly repayments required. Once the borrower moves out of the house or dies, the lender will gain possession of the house and the loan will be repaid.

A reverse mortgage is usually government-insured loans. These types of reverse mortgages are also known as home equity conversion mortgages (HECM). The first such mortgages were issued in 1989. Over a period of time, senior reverse mortgages have come to be offered in two categories: reverse purchase and reverse refinance.

  • Reverse purchase
    This type of senior reverse mortgage lets the borrower buy a house by paying a down payment. There is no need to repay the mortgage in the future.
  • Reverse refinance
    This type of senior reverse mortgage lets a borrower pay off an earlier mortgage or receive a line of credit or monthly check. Some reverse refinances can also give the borrower a combination of all three.

How to apply for a senior reverse mortgage?
It is required that you meet a counselor before you apply for a senior reverse mortgage. The counselor should be approved by the U.S. Department of Housing and Urban Development (HUD). A list of approved counselors can be found on the official website of the HUD. The counselor will discuss the eligibility of the borrower, the effect of the mortgage on the borrower’s finances, and availability of other feasible alternatives. The following are the qualification criteria for applying for a senior reverse mortgage:

  • The borrower’s age should be at least 62 years.
  • The house that is put up for a reverse mortgage must be the principal residence of the borrower.
  • The principal residence should be in good condition and properly maintained. Before applying for a reverse mortgage, repairs must be done in case of any damage.
  • The borrower must own the house that is put up for a reverse mortgage, or there should be low mortgage balance that can be easily paid off with the reverse mortgage. A borrower will not qualify for a reverse mortgage if the balance of traditional balance is quite high; this is because there is a limit on the money that can be borrowed.
  • The borrower should have enough funds to pay the current property costs such as insurance, taxes, and repair costs.

If you have someone living with you, you will need to consider their housing requirements before applying for a reverse mortgage. This is because in case you decide to move out of the house or in case of your death, the person will have to move out of the house. So, if your spouse, sibling, or any other family member is living with you, they can be listed as co-borrowers of the reverse mortgage. Co-borrowers can continue living in the house in the absence of the primary borrower. However, the co-borrowers age needs to be at least 62 years to qualify for the reverse mortgage. In case, your spouse is not yet 62 years, they can be listed as “eligible non-borrowing spouse”. After the eligible non-borrowing spouse turns 62 years, the reverse mortgage will have to be refinanced to include the spouse as a co-borrower. It should be noted that additional costs are involved in refinancing.

How much can be borrowed with a senior reverse mortgage?
There are a number of factors that determine how much a borrower will get once their reverse mortgage application is approved. The following are the primary factors that affect the reverse mortgage amount:

  • Age of the youngest borrower (in case there is a co-borrower)
  • The current value of the house that is put out for the reverse mortgage
  • Current interest rate

The amount that you receive from your reverse mortgage will be more if you are older, the value of your house is greater, and the interest rates are lower. Also, there are additional costs associated with a reverse mortgage; these costs include origination fee and mortgage insurance premium. These are charged as convenient fees since reverse mortgage doe not require the borrower to make any monthly payments. The origination fee is usually around $2,500 or 2% of the first $200,000. After the first $200,000, the fee is around 1% of the remaining balance with the maximum fee amount being around $6000. The mortgage insurance premium is 2% of the appraised value.

Reverse mortgages have been observed to carry huge risks. They come at a very high cost. For seniors who have retired and do not have an active income source, reverse mortgages can have a high probability of leading to foreclosures and bankruptcies. Hence, reverse mortgages should be considered only when there are extreme financial difficulties. In such cases as well, a senior reverse mortgage should be the last option.

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