There are several types of reverse mortgages available to seniors, depending on their age and health. There are also two types of fixed-rate reverse mortgages, life expectancy set-aside and variable rate reverse mortgages. Listed below are the differences between each of these types. The type of payment you receive depends on your personal situation and your desired length of the loan. For more information, read on! * What’s the difference between a fixed-rate and a variable-rate reverse mortgage?
HECM reverse mortgage
A HECM reverse mortgage is a loan taken against the equity in a borrower’s home. In theory, this equity is equal to the property’s value less any transaction costs, plus the reverse mortgage balance. However, certain HECM options deplete the estate more than others. For example, cash withdrawals at the beginning of the loan are likely to reduce the estate most, while monthly payment plans may reduce it least.
While many seniors find a HECM reverse mortgage an extremely valuable financial tool, it’s not for everyone. In reality, a home equity line of credit, home equity loan, or cash-out refinancing is often a better option for many people. HECM stands for “heck-em,” and is supervised by the Federal Housing Administration. But, what if you’re already retired and need money quickly?
Conventional reverse mortgage
The first major difference between a conventional and a reverse mortgage is the amount of money the borrower must pay. With a conventional reverse mortgage, the loan amount will stay the same until the borrower moves out or dies. In the case of the latter, the proceeds will go to the heirs of the borrower. Conventional reverse mortgages do have stricter rules, however. Borrowers must still pay property taxes and homeowners insurance, and they must maintain their house in pristine condition.
With a conventional reverse mortgage, the homeowner no longer makes payments to the lender. Instead, they choose when they want to receive payments. They pay only interest on the loan’s proceeds. Interest is rolled into the loan balance. In this way, the home remains the borrower’s property, and the mortgage company retains ownership of the property. Consequently, the amount of debt increases while home equity decreases over the course of the loan.
Life expectancy set-aside
Reverse mortgages that are less than stellar credit will require borrowers to set aside a portion of their loan proceeds for “Life Expectancy Set-Asides,” or LESAs. Underwriters initially resisted this requirement, but have since tweaked their processes. Today, the LESA is one of the most common features of reverse mortgages. Here are some important tips for borrowers looking to use LESAs to maximize their benefit.
One of the best ways to determine if your life expectancy is better than your lender’s is to calculate the amount of money that will be needed for housing expenses. To calculate the amount, consider your estimated expenses for living in your current home and over the life expectancy of each co-borrower. If you have co-borrowers who are age 65 and 70, for example, the youngest borrower will require a larger Life Expectancy Set-Aside. 주택담보대출
Variable rate reverse mortgage
Fixed or variable rate reverse mortgages are available for Canadian homeowners 55 and over who are considering a reverse mortgage. Fixed rates provide stability while variable rates offer flexibility. Both options provide lower interest rates than fixed rate loans. Adjustable rate reverse mortgages use an index based on the London Interbank Offered Rate or the Canadian Money Market Trust (CMT). LIBOR is a European alternative to the United States Treasury Rate. Reverse mortgages can be structured as a lump sum, line of credit, or monthly payments.
The fixed rate HECM comes with several restrictions. For instance, the first year of a variable rate reverse mortgage may have a higher interest rate than the second. This is because of the 60 percent utilization rule. Also, all reverse mortgage borrowers must fulfill certain mandatory obligations at closing, such as paying off previous mortgages, loan closing costs, and an FHA upfront mortgage insurance premium. These requirements generally total more than 10% of available principal.