Wow, the time seems to be flying by this year, it’s almost 2011 and another calendar heading for the trash.
So what’s going to be the next big thing for the new year? Well with the phenomenal amount of Baby Boomers retiring, an educated guess would be Reverse Mortgages.
This market is hot at the moment, and with the recession biting many retirees are releasing the equity they have built up in their homes over a lifetime, so that they can comfortably enjoy their latter years.
Officially the Baby Boom started at the end of the Second World War and continued until 1964, so the retiring droves are showing no sign of a let up for the next decade or more, depending of course on the retirement age in their country of residence.
There were just short of 80 Million of us born in just 20 years, it’s quite phenomenal really. The Mortgage Industry has focussed it’s attention quite rightly on the needs and wants of this segment of the market, as for the last couple of decades inflation has rocketed the value of their homes out of all previous proportion.
Traditionally the Mortgage Lender gets the Homeowner to borrow a large sum to purchase a home, paying it back with smaller payments and interest over many years.
A Reverse Mortgage Lender gives the homeowner money, either as a Lump Sum payment, as a Regular Monthly Payment or as some combination of the two. This money is lent against the equity of the home, but no payments are required whilst the borrower is still living in the home. If the borrower is forced to leave the home, for residential care, or passes away, the home is sold to repay the debt, and their heirs and successors receive the balance left over.
The concept of the Reverse mortgage has been around since the late 1980’s, but it is more recently that it has become popular, probably due to the recession and the effect it is having on the elderly’s standard of living.
These Reverse Mortgage products have become ever more sophisticated, and are now considered a lot safer than the earlier ones. Each Lender seems to have put their own quirks into their products, but choosing the right product for your circumstances and needs can still be fraught with dangers and pitfalls for the uneducated.
The majority of IFA’s recommend using a Lender whose product is insured by the FHA, these products are called Home Equity Conversion Mortgages (HCEM). Choosing a Reverse mortgage that is not HCEM could expose the unwary to additional problems and extra costs if due diligence is not undertaken.
There are always pros and cons with any financial product, so being aware of them will prevent you from being surprised by anything nasty lurking in the small print at a later date.
Most Lenders will not expect any repayments whilst you are living. Check that this is included and that there are no grey areas.
Usually after the borrower passes away the family or heirs can have the opportunity to re-mortgage the property and repay the debt. Is this included? Do you want it to be?
Your family should receive all money left over after what is owed to the Lender once your estate is settled.
If the home is not valuable enough to repay the whole debt, your family should not be left with paying the shortfall. The FHA Insurance should cover this, however they will forfeit the right to re-mortgage the home.
Be very aware of what the “plus interest and other fees” and other such statements actually include, and factor them into your figures when deciding to go ahead with a Reverse mortgage or not.
Once you no longer reside in the home, it can be sold or the debt needs to be settled. Just keep this in mind.
Make a decision early in the application process if you wish to fix the costs and interest rates, or you are going to leave them variable The industry standard is to leave them variable, but there are always options open to you if your needs require them to be fixed.
You should keep in mind that no one ever knows what interest rates are going to do, it is a gamble, pure and simple. If we could predict them we would be very very rich.
One of the bigger obstacles that put many people off a Reverse Mortgage is the high up front costs.
The costs of a Reverse Mortgage are quite a bit higher that those of a traditional mortgage. These can be reduced substantially by doing a bit of research, shopping around and finding the “Best Fit” for your circumstances.
FHA insured reverse mortgages have closing cost limits that lenders need to adhere to.
It will also pay you not to just accept the first quote you are given. Get the Lenders to work for their money and get a couple of competitive quotes from different Lenders.
You will be under obligation to maintain the property so that its value and condition does not deteriorate, with older properties the costs of this could be significant and should be budgeted for.
As Reverse Mortgages are for Seniors this upkeep is going to most likely come from contractors, and they are not cheap! Ensure you check with the Lender exactly what is expected on the maintenance front. You don’t want to be obligated to renewing the roof 6 months after receiving your first payment. It would probably make sense to have a fund set aside for eventualities such as this.
As long as the Borrower is knowledgeable about the pitfalls of Reverse Mortgages he should be able to make an informed decision on whether it is suitable for his needs. There is a lot of free information online that can ensure you are more informed when you first apply for a Reverse Mortgage. Be sure to use it. Knowledge is Power, as they say.
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