Reverse Mortgages

A Primer on Reverse Mortgages

Economists report that as housing prices have skyrocketed over the past several years, the amount of money that households are saving through 401(k) plans and FDIC insured savings accounts has fallen.  For many people approaching retirement age that means they may be “equity rich” and “cash poor” at the same time. It is not unusual today to find people living in $1 million homes almost entirely dependent on social security to get by.

A 1994 Advisory Council on Social Security trends and issues concluded that a reverse mortgage could provide an additional source of income for seniors although at the time housing prices were not high enough to make this a meaningful source. Well, things have changed.

A reverse mortgage Florida program is still a loan with your house as the collateral, but it is entirely different from the kind of mortgage you got when you bought your first house. These are the major differences:

The Lender Pays You

That’s correct. You do not make a monthly payment with a reverse mortgage. The lender pays you, and the loan can be set up so that you can get paid in a lump sum, you can get paid regular monthly amount, or you can get paid at the times and in the amounts you request.
The terms of the loan determine what each of these amounts would be. The primary determining factors are your age, the value of your house, and the prevailing interest rates at the time.

You Continue to Live in Your House

Staying in your house is really the whole purpose of reverse mortgages when you get down to it. The twist is that instead of paying somebody else to live there, you get paid while you continue to live there.

You are actually required by the terms of the loan to continue to live in the house as your principal residence. You can spend any amount of time visiting your children and grandchildren, you can travel for pleasure, and you can continue to spend summers at the lake so long as the house remains your principal residence.

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You Retain Ownership of Your House

A reverse mortgage is not a sale. You keep all the rights of ownership that you had before the reverse mortgage loan. You do not need the lender’s permission to paint the house a different color or to remodel. You can put your house on the market and sell it to the highest bidder. You can will it to your children.

If there is a change in ownership, such as by sale or through the death of the last surviving owner, the reverse mortgage will have to be paid off at that time. The lender would be entitled to receive from the proceeds of the sale only the amount you actually received from the lender plus all accrued and unpaid interest to date. Any amount remaining after paying off the reverse mortgage lender would go to you, to your surviving spouse, or to your estate.

The Principal Amount of the Loan Increases With Each Payment

Another way of saying this is that you control the amount that must eventually be paid back by controlling the amount of money you actually get from the lender. A reverse mortgage is still a loan, and the money plus interest has to be paid back at some time, usually from the sale of the house after you and your spouse no longer live there.

Because the principal amount of a reverse mortgage cannot be determined until after you no longer live at the property, neither can the maturity date of the loan. This can a difficult concept to wrap your mind around because it is so different from conventional mortgages.

You Can Never Owe More Than the Value of Your House

This is true for the two reverse mortgage products sponsored by the Federal government (HECM and Home Keepers) although it may not be true for privately created reverse mortgage programs.

The benefit of the Federal programs is that you, your surviving spouse, or your estate, can never owe more than the loan balance or the value of your house, whichever is less. Your reverse mortgage lender cannot require repayment from you, your surviving spouse, or your heirs, or from any asset other than your house.

Adjustable Rate Mortgages

A Guide To Adjustable Rate Mortgage Loans

An effective tool used by home buyers, ARM or Adjustable Rate Mortgages, offers a lower interest rate at the beginning of the loan and the risk of a hike in rates is shared by the borrower and lender.

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ARM, is ideal if you are certain about rising income expectations and short-term home ownership. There are four basic aspects. One is that the initial interest rate is fixed 1-3 percentage points lower than fixed rate mortgages. Second there is what is known as adjustment interval, when after the initial period has elapsed the rate is modified in keeping with prevalent rates. Third, an index against which lenders can measure the difference between the interest earned on the loan and what would be earned in actuality in other investments. And, fourth, the component added by the lender to the index, usually 1.5-2.5 percent.  The American Mortgage Association has a membership program that explains this in detail to consumers and the risked involved.

An ARM has in addition, safeguards like interest rate caps. This limits the amount of interest rate that can be applied to the payment during adjustment. Normally this cap would be about 2% point cap over the life of the loan.

ARM is ideal when it lends you buying power. You can opt to buy a property with a higher value and still pay a lower initial monthly payment. If you know for certain that you will reside in the house you are buying for a maximum of 5-7 years then ARM is the mortgage that will save you money. If you are prepared to take risks then ARM offers the greatest possible savings especially if the rate stays steady or declines over the years.

There are special loan programs for physician mortgage loans and a doctor mortgage, which will offer lower rates with no private mortgage insurance.

ARM is a calculated risk as there are no certainties. However if at the end of five years your plans change and you are about to continue in the same home for another 10 years then it is prudent for you to switch from ARM to a fixed rate mortgage.

If you’re trying to acquire properties as an investor with greatest amount of cash flow then you should consider an ARM or Buy houses for cash.

Home Equity Loan

Home Equity Loan After Bankruptcy

Getting a 2nd mortgage loan or home equity loan after a bankruptcy is possible, but it will cost more with higher rates and more points. However, loan applicants should be aware of certain disadvantages to bad credit loans. A bankruptcy is destructive to credit scores.

In reality, many financial experts discourage bankruptcies. Those who file Chapter 7 or Chapter 13 are subjected to higher finance rates on homes, cars, etc. Before applying for a 2nd mortgage, know what to expect and understand the basics of getting a reasonable rate.  The American Mortgage Association offers information and rates for home owners who have had filed for bankruptcy in the past.

Physician Home Loans

Expect Higher Finance Fees or Interest Rates

After a bankruptcy, many people are hesitant to apply for credit. They expect higher rates, which will also increase monthly payments. However, obtaining new credit accounts is crucial to re-establishing and building credit history. On the other hand, getting a lender to approve a credit card application after a bankruptcy is challenging. For this matter, some people choose to get a 2nd mortgage loan.

Getting approved for a 2nd mortgage following a bankruptcy is easier because the loan is secured by your home or property. Thus, if you stop paying on the loan, the lender may claim your property and resell it to recoup their loss.

While these loans are great for improving credit, applicants should not expect the best rates. Traditionally, 2nd mortgage loans have higher rates than first mortgages. However, if you have a recent bankruptcy, anticipate above average rates. To avoid a huge monthly payment, borrow a small amount of money.

Another option involves borrowing money, and depositing the funds into a savings account. Over the course of six months, repay the lender using the deposited funds. This way, you improve credit history and avoid the risk of not being able to repay the loan.

If you are a doctor or in the medical field, you are fortunate to have an option for physician mortgage loans, which don’t underwrite mortgage loans as stringent as non doctor home loans.

Using Sub Prime Loan Lenders For Best Rates

Applying for a 2nd mortgage with your current lender may not be the best option. If you obtained your first mortgage with good credit, the lender may not approve your loan application following a bankruptcy. Instead, contact several sub prime lenders. Sub prime lenders approve loans for all credit types. Hence, applicants can get approved after a bankruptcy, foreclosure, repossession, etc.

Furthermore, sub prime lenders usually offer better rates than traditional mortgage lenders or banks. Online mortgage brokers can help you find a bad credit or sub prime lender. Moreover, brokers offer applicants various loan options. As a result, loan applicants can select the lender offering the best rate and loan terms.