So, you’ve just closed on your reverse mortgage, and you’re wondering where to go next. Thankfully, the bulk of the paperwork and administrative hassles are behind you, but there are still a few important details that you’ll need to know. Between property taxes, homeowner’s insurance, maintenance fees, and the costs of the Mortgage Insurance Premium, there are several other important issues that you should be aware of. For now, let’s take a closer look at the essentials.
Managing Your Money
Should you save or spend your loan proceeds? Can you afford to take a vacation or buy a new car? While it isn’t our place to give strict directions on how you should make use of your money, there are a handful of concerns that you should be aware of. Let’s start with the Mortgage Insurance Premium (MIP), an insurance fee mandated by the Federal Housing Administration.
After closing a reverse mortgage, you will be charged with a MIP that is based on the amount of proceeds withdrawn after the first year of the loan. If you take less than sixty percent of the available proceeds during this first year, you will only have to pay an upfront MIP worth 0.5 percent of the appraised value of your home. But, by taking over sixty percent, the MIP will be raised to equal 2.5 percent of your home’s appraised value.
To visualize these numbers, let’s look at a sample home worth $500,000. If 0.5 percent of $500,000 is $2,500 and 2.5 percent of the total value is $12,500, you can save $10,000 as long as you don’t withdraw more than 60 percent of your funds from the reverse mortgage.
Of course, that’s not the end of the story. Money management and investment is a very complex topic that cannot be summarized in a few short paragraphs. To make the best possible decisions while also balancing your long-term and short-term goals, we recommend speaking with a licensed professional.
Keeping Up With Responsibilities
We often mention the importance of paying property taxes, insurance fees, and maintenance expenses – and for good reason. These payments, as irritating as they may be on the surface, are absolutely essential to maintaining your reverse mortgage so that the loan does not become due and payable before you’re ready. As long as proper precautions are taken, there should be nothing to worry about. Nevertheless, it’s important to understand your responsibilities as a homeowner and borrower.
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Repayment Options & Information
If you take away anything from this article, remember this: you will never owe more than the value of your home at the time that the loan becomes due and payable. Of course, you’re probably wondering: when will the loan become due and payable? And, what can you do to make sure you stay in control of this process?
Generally, the loan will become due and payable once all borrowers have sold the home, moved out, or passed away. However, when borrowers neglect to keep up with property taxes, homeowner’s insurance, and property maintenance, the loan may become due immediately.
Your preferred method of paying off a reverse mortgage may vary from other borrowers, but in general, most people choose to pay with the proceeds taken from the sale of the home. Thankfully, if the balance on the loan is worth less than your home’s value, you can pocket the difference after making the sale.
That said, you can also make payments on the loan during its lifespan if you wish. If you would like to make payments during the life of the loan, you may do so without penalty. In this case, it will be useful to research a reverse mortgage loan amortization schedule (you can use this information to calculate exactly how much money you will need to pay each month to avoid the loan from amortizing negatively). This method isn’t for everyone, but it’s still a completely viable option.
Or, let’s say that you or your heirs would prefer to keep the home. By refinancing the home into a traditional mortgage, your heirs will have another means of repayment. Alternatively, heirs who qualify for a reverse mortgage may also refinance the loan into another reverse mortgage.