Advantages of Reverse Mortgage

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Texas Reverse Mortgage allows the property owners who are 62 and above to convert their real estate equity into spendable cash. Reverse mortgages are insured through the Federal Housing Administration or FHA. This means if the borrower cannot repay the debts, they will be compensated with the help of FHA Reserves. 

Reverse Mortgages are also called HECMs - Home Equity Conversion Mortgages by the Government. In this, the borrowers must pay insurance upfront premiums and the annual premium of 0.5% of the outstanding loan in order to participate. These premiums are then used for funding the FHA reserves. 

Apart from the FHA insured reverse mortgages, mortgage lenders have also mentioned two other types

  • Single-purpose reverse mortgages 
  • Proprietary reverse mortgages

Single-purpose reverse mortgages

These types of reverse mortgages are not so common. The money you will obtain from these can only be used for one specific need, like renovating your house or paying your taxes. These options can be found via certain states, local governments, and non-profit organizations.

Proprietary reverse mortgages 

These mortgages are available through Lenders in Texas and are not subject to the FHA Loan Limits.

How do reverse mortgages work?

Reverse mortgages can give one access to funds without sending an immediate bill. For example, let's say that with a traditional mortgage, if you borrow $100,000 for a 3.4% of fixed interest rate and the loan period is for 30 years, your monthly payment for the principal and the interest amount will be $443.48. However, if you borrow $100,000 with a reverse mortgage, your required payments for interest and principal are 0.

Sounds too good to be true, right? Well, you will still owe the money. However, you do not have to pay back unless and until you sell the house, move out or die. If the latter is the end of your reverse mortgage, the payoff responsibility will fall on your heir or spouse, who will be selling off the house. 

With the example mentioned above, the borrower roughly pays around $443 every month, of which $160 is the principal amount that will reduce the loan balance, and the rest of the payment that is $283, is the interest amount. Local mortgage lenders charge this for the amount that you borrow from them. This payment plan continues every month, with more of the money going towards the principal and lesser towards the interest gradually until the loan term is up.

When we talk about a reverse mortgage, this process gets flipped. Instead of monthly payments, you will have to pay nothing. But, that does not mean that the loan is free. This interest cost will be added to the mortgage balance, and so, in the second month, this balance will grow. Because this loan balance is now more prominent, the interest cost increases. This process keeps continuing till the time comes for the loan to be repaid. The repayment process usually happens within a year of moving out of that property or when you die. 

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Advantages of reverse mortgage

Better expense management in retirement

Many seniors experience a significant reduction in their income when they retire. As a result, their monthly mortgage payments can be one of their most significant expenses. However, with a reverse mortgage, you can continue to pay your bills and supplement a diminished income.

You will not have to move

Instead of finding a new and more affordable house, the reverse mortgage allows you to age peacefully in one place and stay near your friends and family. Additionally, because there is a cost to the reverse mortgage, it can be cheaper to get a reverse mortgage instead of moving or buying another home or renting in a new location altogether. 

You will not have to pay taxes on your income

The income you get from the reverse mortgage is not taxable because, according to IRS, that money is considered as loan proceeds. However, the tax rules can be complex, so it is advisable to do your due diligence here.

You are protected if the balance exceeds the home's value

Because the reverse balance eventually grows in size, it may be possible to exceed the property's fair market value with time. But, the amount of debt to be paid will never exceed the value of the property. This is because a reverse mortgage is an example of non-recourse financing. 

Your heirs will have options

Reverse mortgages can be paid off by the borrowers sooner. But they end when the borrower moves, passes away, or sells the home. In this situation, the heirs have ample choices. They can either sell off the property for repaying the debt or keep any equity above the loan balance. They can also control the home and refinance the reverse mortgage balance if the property's value is sufficient. On the other hand, if the debt exceeds the property's value, the heirs can settle this loan by giving the title back to the lender. The lender will then file a claim for the unpaid balance with the FHA.

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The bottom line

A reverse mortgage can be helpful in a lot of scenarios. A few factors that make reverse mortgage worth it are as followslo

  • Your home is increasing in value considerably. If you are building up equity in your home, you can take out a reverse mortgage and still have money left over for the property.
  • You plan to stay in the house for a long time. Like a regular mortgage, there are significant upfront costs associated with that loan. However, you also want to be sure to live in the home for long enough to make those costs worth it. 
  • You can cover the costs of your home. Staying current on the property taxes, insurance and maintenance are essential to keep the reverse mortgage current. But it is necessary to have plenty of cash flow for such expenses.

Lastly, the decision to take a reverse mortgage should be weighed carefully. If you are planning to take a reverse mortgage, be sure to reach out to Mortgage Lenders in Texas. Their expert lender will give you all the details you need to know about Texas Reverse Mortgages.