Using a reverse mortgage to protect the value of your home

Using a reverse mortgage to protect the value of your home

Using a reverse mortgage to protect the value of your home

Using your reverse mortgage to protect the value of your home.

Many consumers have misconceptions about these loans, often leading them to believe that these mortgages have too many disadvantages and should only be used in extreme financial hardships. Our reverse mortgage myth articles debunk these misconceptions, but they have advantages that most consumers and even industry professionals don’t know about or haven’t considered, and sometimes disadvantages that haven’t been considered either. One such benefit is the tax planning options described earlier. Another is getting housing volatility protection. Yes, it is actually possible to use a reverse mortgage to partially protect yourself from falling home prices. We will describe in detail how this is achieved and what the protection can and cannot do for you.

First, let’s discuss how and why a reverse mortgage offers protection against market volatility. This protection is not a guarantee of the home’s value, but rather a way to ensure that some of the home’s value is liquidated without ever having to pay off the mortgage or take a personal loss due to the higher-profit reverse mortgage. the value of the home. However, there are conditions that limit the type of protection you get. To begin with, a reverse mortgage works as home equity protection because you are withdrawing money from the equity of your home, which you have full control over, while never having to make a mortgage payment while living in the home. As a result, if home values ​​plummet, you’ve already taken money out of your home and have no obligation to make a payment on that reverse mortgage while you live there. You can still use or invest the money you received from the reverse mortgage, but you will never be forced to move out of the home or make a mortgage payment while living in the home.

After you die, if the reverse mortgage balance is higher than the value of your home, your heirs can choose to transfer the home to the bank without any personal consequences or financial obligations to them. Regardless of how much the home lost in value, your heirs will never have to pay the shortfall if they decide to pass the home on to the lender. You still have your money, and if you have money from the mortgage, you can leave it to your heirs.

On the other hand, if there is equity in your home and you want to sell or refinance it, you keep the equity, not the reverse mortgage lender. The same goes for your heirs, who can choose to refinance the home and keep it, or sell it and receive its equity if the home’s value is greater than the mortgage repayments. Most of the time, the home still has equity remaining when the borrower dies. For more information explaining how capital growth works, see ‘what will happen to my capital’

So how much protection can you get? Well, it’s not full home value protection, but it’s partial. The size of the loan is determined by the location, the age of the borrower and the value of the home. Only a certain percentage of the home’s value is lent. Assuming you borrow 60% of the home’s value, the protection offered is that you won’t lose more than 40% of the home’s value at the time you take out the reverse mortgage. Basically, the loan to value of your loan dictates how much protection you have.

So what conditions apply? First, if you owe more on the home than it’s worth and want to move, you’ll have some issues to deal with. If the sale proceeds don’t cover the loan balance, you won’t have an obligation to pay the shortfall, but you won’t have any equity and will have to work with the lender to transfer the title to them. This is a key point because a reverse mortgage differs from a conventional mortgage in that the lenders only recourse is against the home only, not the home and the person. As a result, the lender cannot obtain a default judgment against you to pursue any losses it incurs. Then, after you pass away, your heirs will have the choice of keeping the home or turning it over to the lender. They have six months to decide and act. If they are set on keeping the home and you owe more than it is worth, they will have to pay the shortfall. However, they are free to surrender the home to the bank and pay nothing.

In reality, it is very rare for a reverse mortgage to exceed the value of the home. In most cases, the equity in the home grows and the borrower can sell at any time without any worries, and the heirs receive the equity later if they choose to stay in the home. However, as recent weather has shown, it is possible for home values ​​to fall. This, combined with a growing mortgage payment balance, can result in a reverse mortgage balance that is higher than the value of the home.

Finally, why does this defense work? At first glance, it seems too good to be true. It works because of the structure and collateral of these loans. First, the FHA insures most reverse mortgages. FHA insurance paid at mortgage closing and its ongoing service fees pay for the lender’s negative equity loss insurance. FHA insurance is an expense that appears under the term MIP on the closing statement. This fee is deducted from your loan proceeds. Next, because you can only borrow a percentage of the home’s value, it’s rare for this insurance to pay out — but it’s become more common in the past few years. Protection is just one of the benefits of reverse mortgages. There are both advantages and disadvantages. Although a reverse mortgage has many advantages, be sure to know its costs and disadvantages. This tool is not suitable for everyone. Talk to a professional for more information or visit my site for a complete guide to a reverse mortgage.

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