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Reverse Mortgages

May 29, 2008  |  Difficulty: Easy

Path to mortage
How do you reverse a mortgage? Simply put, you are getting some of the money off of your property without putting it on sale. You are still the owner and you still have all of the responsibilities, but with a little more money in your pocket from the cash you get out of your property. Reverse mortgages (RM) work on agreements. When the agreement is over, you or your heirs, must pay back all of the money that you borrowed, interest included.

There are many different kinds of reverse mortgages. But most are similar. How? You must still pay for property taxes, home repairs and homeowner insurance. This will not change. And there are a few aspects of reverse mortgages that you should be aware of. You should know all you can before you make a final decision concerning this action.

RM Cancellation

After the reverse mortgage closes, or finalizes, you have three days to reevaluate your decision. This period is sometimes called the “cooling off” stage. This is a time that benefits consumers who want to reverse the contract.

If you think things through and have a change of mind, you can cancel the transaction. But if you do not do this before three business days, you are stuck with your previous decision. Note that business days include Saturdays, but do not include Sundays or recognized public holidays. Also note that your retraction must be in writing. Your lender may be able to give you a form, but you can also write your retraction in a letter delivered by hand, mail or fax. Remember, this must be sent before midnight on the third business day. In your letter, clearly state that you want to cancel the reverse mortgage, and try to include your loan number.

RM Debt Limit

The amount you will need to pay back at the end of your agreement will equal all the money that you borrowed (even monies used to pay back other debt) including the interest that added onto your balance. If the total reverse mortgage loan amount is below the total cost of your home, then you can keep the amount that is left over.

The plus side is that you cannot owe back more than the present total cost of your home. When seeking re-payment, the lender cannot deduct anything from your income, assets or your heirs. The lender is basing your reverse mortgage on the value of your home at the time of giving you the loan.

This is widely known as the “non-recourse limit”. The lender cannot have access to any of your possessions besides the value of your home when requesting repayment.

RM Debt Payoff

You can get a reverse mortgage if this will be the only debt on your home and thus is the first debt that will be paid off. If you do have current debt on your property you can choose to:
  • Pay off the debt before seeking a reverse mortgage.
  • Pay off the previous debt with the money that you will receive from your reverse mortgage.
It will be best to pay off the previous debt with a single payment from the monies in your reverse mortgage. This, in effect, will be consolidating your debt to the reverse mortgage.

RM Financing Fees

Before you get the loan, there will be fees involved. You can finance these fees with the monies from the reverse mortgage or you can pay the fees with your own money.

Your lender may give you the “financing loan cost” option. This simply means that you will be attaching the unpaid fees onto your reverse mortgage loan. Remember this amount adds to the amount of interest that you will need to eventually pay.

RM Loan Amounts

The amount of money that you are able to borrow will depend on the company you choose. Different companies have varying rules and regulations. Generally, the amount is based on the current total value of your home, and your age.

Typically:
  • Being older is of benefit to you. You can mortgage more of your home’s value.
  • If the value of your home is high, you have more money that you can access.
  • The ending amount that you are able to borrow is also affected by the current interest rate and the standard closing cost associated with home loans where you live.
RM Repayment

The repayment occurs when the last borrower dies or sells the property. However, the reverse mortgage lender can insist on repayment if: 
  • You do not pay property taxes
  • You do not keep the home in good repair
  • You do not keep the home insured
These stipulations are put into the contract because the lender is giving you the money based on the overall value of the home. All three of the previous listed stipulations can drastically affect the value of your home.

Other situations where the lender can insist repayment are:
  • If you are filing bankruptcy
  • If you abandon your home
  • If engage in fraud or misrepresentation
  • If a government agency seeks your property for public advancement (like building a new road)
  • If a government agency closes your property due to health or safety reasons
The list above gives situations that would hinder your repayment or decrease the overall value of the property. Under these conditions the lender will want to get as much money off the property as possible, to repay the loan.

Still, here is another list of situations when the lender could immediately seek repayment:
  • If you rent out all or part of your property
  • If your title shows that you have added a new owner
  • If you change your home’s zoning classification
  • If there is documentation that you have taken out new debt on your home
With all of this stated. A reverse mortgage is most applicable to individuals who do not have debt attached to their home, and if only you or your immediate family will be living on the property.

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