Whether you are retired or approaching retirement, planning your reverse mortgage is helpful. A reverse mortgage is a loan that allows homeowners over the age of 62 to convert a portion of their home equity into cash. This loan suits people who need additional funds for their retirement. To help you learn more about it, we will provide this in-depth discussion of reverse mortgages. 

How Does It Work?

Reverse mortgages work by paying off a portion of your home equity to pay an existing mortgage. The borrowers will not be required to make monthly payments until they move out of the home, neglect to maintain the home, pass away, or fail to pay taxes and insurance. The interest for the month will be added to the final loan balance. 

Once your existing mortgage is paid, your lender will pay you for any remaining proceeds from the new loan. If you already own your home, you will get all the proceeds from the loan. To know how much you will get, you can use a reverse mortgage calculator. 

How Much Does a Reverse Mortgage Cost?

Just like any other mortgage, there are costs associated specifically with the Home Equity Conversion Mortgage (HECM). These costs are typically higher than those associated with a traditional mortgage. Here are some of the fees you can expect:

Mortgage Origination fee – This is the amount of money a lender charges to process your loan. Usually, the cost is 2% of the first $200,000 of the home’s value plus 1% of the remaining value after that. The FHA has set a minimum and maximum cost of the origination fee, so no matter what your home is valued, you will not pay less than $2,500 or more than $6,000.

Service fee – This is the fee by a lender for the services they provided to administer the loan. The cost is up to $35 each month.

Upfront MIP – The upfront mortgage insurance premium (MIP) is paid to the FHA when you close your loan. The MIP protects you and the lender by making the loan a non-recourse loan. When your home sells for less than the loan amount, the difference will be covered by the insurance, so you won’t end up underwater on your loan, and the lender doesn’t lose money on their investment.

Appraisal fee – Appraisals are needed to know the market value of your home. The cost of the appraisal will depend on factors like the location and size of the home. 

The Pros and Cons of Reverse Mortgages

Before you make a decision, you need to weigh the advantages and disadvantages. Applying for a loan isn’t easy, so you have to think about your options carefully. You can also speak to a financial advisor to help you out. Here is the list of advantages and disadvantages: 

Advantages

  • You are still the owner of the home, which means your name stays on the title.
  • You are insured from declining home values. 
  • You don’t need to submit your credit score since there isn’t a need for it. However, the lender will review your credit history.
  • You can access your equity without selling the home or paying a monthly mortgage.
  • You can use the proceeds on whatever plans you have. 

Disadvantages

  • Decrease in equity
  • If you can’t pay, the loan balance will increase.
  • You can’t easily pass the home to your heirs without costs.
  • You may outlive your proceeds. 
  • High costs and fees.

Final Thoughts

Reverse mortgages are a fantastic option for supplementing your retirement. You just need to thoroughly review the pros and cons against your needs and limitations. If you do plan to apply for one, you need to contact a reliable lender. 

Are you looking for reverse mortgages in Louisville, Kentucky? We are a mortgage broker that has financed home buyers’ and homeowners’ dreams! Contact us today.