In 2014, over 23,000 homeowners decided to revamp their financial life with a reverse mortgage. This number is surprising to many homeowners because the majority of big banks have stopped or severely reduced the number of reverse mortgages they approve. Because of this, many homeowners who secure a reverse mortgage are dealing with lenders that are lesser-known. While this may be a scary situation for many property owners, there are several tips to help streamline this process and ensure whether or not a reverse mortgage is best for you.
What is a Reverse Mortgage – A Brief Overview
Before delving into the steps in obtaining a reverse mortgage, it’s important to fully understand what this type of financial deal truly encompasses. A reverse mortgage is primarily used by Americans in retirement. While there are many sources of income a person in retirement may live off of, if you own a home a reverse mortgage helps add to your monthly income for greater comfort and financial security.
The term “reverse mortgage” directly references its process. Instead of payments going to a mortgage company, the payments are reversed and you (the homeowner) receive monthly payments based upon the equity that’s been built within your home.
Review the Payout Options
Just like any other payout system, not all reverse mortgage plans are the same. There is a wide variety of payout options which allow you to tap into your home equity. Perhaps one of the most popular options is provided by the Federal Housing Administration, which offers a total of five different payout plans. One of the most popular payout options is one where payments are sent out to the homeowner as long as they are alive and lives within the home as their primary residence. There are also plans based upon a fixed number of years. Another popular option is to use the equity within your home to create a line of credit, which allows you to fully control how much money is removed from the equity and when the funds should be delivered; however, this option does feature a maximum payout amount.
Read the Fine Print
While a reverse mortgage may be an ideal choice for some, for millions of others, it ends up being one of the worst financial mistakes of their life. Many reverse mortgage agreement require the homeowner to continue to pay for utilities, real estate taxes, flood insurance and homeowners insurance. Should the homeowner stop paying these expenses, the lender may actually stop sending out payments, or if a lump sum was delivered, action can be taken against the homeowner, which typically includes foreclosure on the home. With a reported 70 percent of borrowers requesting lump sums instead of monthly payments, many homeowners find themselves in a dire situation when the cash runs out and they’re unable to keep up their end of the deal, which is paying for regular monthly home fees and maintenance costs.