We have spoken with several lenders recently about a reverse mortgage. Our property is worth roughly $400,000 and we have been told that we could get a $200,000 lump-sum payment or monthly payments ranging from $700 to $1,200. Why can't we get a bigger loan and why are the monthly payment possibilities so different?
Reverse mortgages insured by the FHA come in two forms. The "standard" reverse mortgage allows you to borrow more but has high up-front fees. The "saver" program has far-smaller up-front fees, but you cannot borrow as much. Interest quotes, of course, can vary.
With a reverse mortgage, you are not required to make monthly payments for principal or interest – but you must continue to pay for such things as property taxes and insurance. Reverse mortgage borrowers who do not pay taxes, water bills or association fees can face foreclosure and the loss of their property.
Depending on the equity available, you might use a reverse mortgage to receive a monthly stipend. However, interest is being charged and the loan balance grows each month. When you move, sell or die, the loan must be repaid.
The home secures a reverse mortgage and there can be no other claims against the borrower or the estate. If the value of the home is insufficient to repay the debt the lender then turns to the insurer (the FHA) for the balance. If your heirs want to keep the property, they must repay the debt, perhaps by refinancing the home.
Reverse mortgages are complicated and part of the bigger issues associated with financial and estate planning. Given such complexities, it's important to speak with fee-only financial planners and attorneys who specialize in elder law before agreeing to any reverse mortgage proposal.
A less-tangled alternative to a reverse mortgage may be to sell the present property and to then use the check from closing to buy something less expensive – and perhaps mortgage-free.
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