How to know if a reverse mortgage is for you
So, is it a good idea for me to take out a Reverse Mortgage?
This is a decision only you can make. There are, however, a few things you need to consider;
Is there some other way to raise the cash you require? Reverse Mortgages are expensive. If the amount of cash required is small such a loan is not worth the cost of the setup fees etc.
Even for a larger amount of money, it makes better financial sense, if you can afford the repayments, to take out a standard mortgage or personal loan, or free up cash by downsizing your home.
Find out how portable the loan will be; i.e. if you move home do you have to immediately repay the loan, or can you attach it to your next home?
Before entering into a Reverse Mortgage (Home Equity Release Mortgage) make sure you seriously consider the effect it may have on your future, especially as regards any move you may wish to make and the capital you'll need to make that move. Also consider how important it is for you to be able to leave something to your children in respect of an inheritance of some sort.
Some companies offer what is known as a no-negative-equity guarantee which is exactly what is says; a guarantee that ensures that when you sell your home, if you receive less for the home than the value of the outstanding loan, neither you nor your estate will have to make up the shortfall. Get professional advice in this regard if you need it.
Shop around for a good deal. Make sure you read the contract well and understand exactly what the deal you're offered really means before you sign anything.
If you're on the pension (and Reverse Mortgage recipients usually are) make sure that receiving funds such as these do not jeopardise the receipt of your benefit.
The Bottom-line:
Reverse Mortgages are not a bad idea, but neither are they necessarily a great idea. If you have an urgent need for cash, e.g. for a surgical operation or the like, then a loan like this can be perfect for your needs. However, make sure you understand the drawbacks. They are expensive, and much of the expense is invisible. That is, it is in the form of interest repayments which are constantly growing without you realising it.
Also, if you have no family and no one you want to leave your home to you may as well spend your money before you go! In that case, a Reverse Mortgage may be perfect for you. However, if you have family or others you are hoping to leave a nest-egg to, beware.
If you have a need for some extra cash, perhaps a better scheme would be for those who you're wanting to leave money to, to take out a loan on your behalf. That way it's like they're making an investment in a property that should increase in value over time.
For more information on home loans, refinancing your loan, or interest rates, contact the team at Futurisk, enquiries@futurisk.co.nz.
You've probably heard of a Reverse Mortgage, sometimes called a Home Equity Mortgage. With our aging population, they are becoming more common. Reverse Mortgages can be a good way to free-up money to spend on things you want - provided you're aware of the many pitfalls.
What is a Reverse Mortgage?
A Reverse Mortgage enables you to borrow money against the equity you have in your home, up to a proportion of the value of that property.Repayments on the loan are made when you leave the property; that is often when a person sells, moves into a retirement home, or dies.
How much can I borrow?
The lender will calculate the maximum amount you can borrow according to your age and the value of your home. If you're aged between 60 and about 65, you will usually be able to borrow about 20% of the home's value. This proportion increases as you get older, so that by the time you're over 85 it can be as much as 45% of the house value.
How is the loan paid out?
A Reverse Mortgage loan may be paid out in one of three ways;
a lump sum, which is great if you are borrowing for a particular one-off purchase;
small regular payments, which is perfect if your retirement income is not enough to cover your regular expenses. This option is not offered by all companies, however.
a line of credit or a revolving credit loan.
Would I be eligible?
To be eligible for a Reverse Mortgage, you must own your own home and, usually, be 60 years or older.
Are there other things I should know?
Setting up a Reverse Mortgage can be expensive. You will be required to have your home valued, that will cost around $400. Some companies insist you do this every five years or so which can become quite a sizable on-going expense.
Then there will be set-up fees for the loan. These can vary from around $1000 to $2000 plus legal costs.
What's more, most companies will insist that you keep up with payments for insurance on the home, and that property maintenance is kept to their standard
What about the interest rate?
Be careful! This is where things can get expensive. You do not make regular repayments on a Reverse Mortgage loan. The loan is repaid in full when the home is sold or you no longer have control over it. Your interest rate will be higher than a normal mortgage rate and, as it compounds, you can quickly lose the equity in your home.