Table Of Contents
- 1 Reverse Annuity Mortgage
- 2 What is a Reverse Annuity Mortgage?
- 3 Requirements to qualify for R.A.M.
- 4 Types of Reverse Mortgages
- 5 Similarities of Proprietary and HECM Reverse Mortgages
- 6 Pros of Proprietary Reverse Mortgages
- 7 Cons of Proprietary Reverse Mortgages
- 8 Pros of A Reverse Annuity Mortgage
- 9 Cons of A Home Reverse Annuity Mortgage
Reverse Annuity Mortgage
Ever thought of Reverse Annuity Mortgage as your retirement plan? Growing old is inevitable, and it comes with retirement. When young, our main goal is to lead a good and peaceful life even at our old age.
There are different retirement plans that people apply, and one of them is the reverse mortgage plan which is our primary discussion here.
Though people also prefer other plans like traditional pensions, defined contribution plans, solo 401[k] plan, and IRA plans, among the many. Below are details of Reverse Annuity Mortgages: what a R.A.M. is, types of R.A.M., pros, and cons of types of R.A.M.
What is a Reverse Annuity Mortgage?
This is a loan that allows homeowners aged 62 years and above to borrow money and use their homes as security for the loan. The money is mostly used to pay health care expenses, current mortgages, and supplement current income.
It also allows the owner to convert into cash some of the assets they built in the home. It is better to know that repayment is not required until you move, sell the house, or die when RAM is established.
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Reverse Annuity Mortgage works well for those old and without an heir to their homes, or they have no plan to leave home to their children or relatives. Also, those mostly referred to as ”house rich but cash poor” tend to benefit greatly from RAM.
However, if one among the couple is not registered for the program and the one registered dies, they will continue to use the house as long as they pay all the insurance and taxes and maintain the property. Though, the spouse will not continue benefiting from the program since it was not part of the agreement.
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Requirements to qualify for R.A.M.
Must be 62 years or older
Live in the home
Have a low mortgage balance that can be paid with the loan proceeds or own the home outright
For eligibility, those qualified must obtain consumer information from HUD-authorized counseling sources for them to get the loan.
Types of Reverse Mortgages
There are three known types of reverse mortgages. They include;
Single-Purpose Reverse Mortgages
Reverse Annuity Mortgages
Proprietary Reverse Mortgages
Among the three types, the single-purpose reverse mortgage is not as popular as the other two; thus, our main attention will be on the two widely known reverse mortgages.
Proprietary Reverse Mortgages
Private lenders back these types of mortgages. They largely benefit owners who want more money, and their homes are appraised at higher values.
This implies that you can be eligible for proprietary reverse mortgages if your home is worth more than the federally backed HECMs 2021 lending limit of $822,375.
Those who own the home outright or have a low balance qualify for more funds. Sometimes counseling is required before applying since it helps compare the benefits and costs of a HECM and Proprietary.
Payment will be your choice between a series of monthly payments and a lump sum.
Proprietary reverse mortgages are not federally insured, which means they do not require up-front or monthly mortgage insurance premiums.
Whether that gives it an upper hand over HECM depends on the interest rate, and they are willing to advance based on the value to compensate for the lack of insurance.
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Home Equity Conversion Mortgages
Also known as Reverse Annuity Mortgages. These mortgages are federally insured, meaning HUD backs them. They come with high up-front costs and are likely to be expensive compared with traditional home loans.
However, because it carries no medical requirements or income limitations and can be used for any reason, they are the most widely used.
To ensure the homeowner is fully informed about the cost, responsibility, and payment options, they recommend counseling before applying for the loan. So long as any interested party is eligible, they are also informed about government-issued alternatives or non-profit agencies.
They offer counseling sessions, and the charges can be paid from the loan proceeds.
To receive the best results, it is significant to own or owe very little on the home. The eldest and have higher equity are given more money though how much you can get is revealed after the counseling sessions. Some factors determine how much you can borrow and are:
The value of your home
Your age and,
Current interest rate
When the loan is established, you can decide on payment options. You can use the option that allows monthly cash fees for a certain period or a tenure option that pays monthly developments for all the time the home will be your primary residence.
The credit line is another option that lets you draw from the account or can even use both the credit line and the monthly premiums. HECM also gives you an option to change your payment option for a low fee if your situation changes.
Similarities of Proprietary and HECM Reverse Mortgages
In both mortgages, you remain as the homeowner.
Both have unlimited use of the proceeds.
They all allow you to borrow against the equity in your home.
Both are more expensive than traditional home loans.
In both cases, counseling is required before applying for the loan.
Differences between Proprietary and HECM Reverse Mortgages
The proprietary interest rate is currently 6% higher than that of HECM, which is 4%.
Unlike HECM, which offers borrowers options for their disbursement, proprietary does not offer options.
Proprietary releases the proceeds in a lump sum while HECM releases them according to your wish, either in a lump sum, monthly, or even credit line.
Federal Housing Finance Agency insures HECM while proprietary is not insured.
HECM has a loan limit of $822,375; while proprietary does not have a limit, it can exceed that amount.
Unlike proprietary, where borrowers are not protected, HECM borrowers are protected since there are guidelines put in place by the insurer.
Proprietary is backed by private lenders, while HUD backs HECM.
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Pros of Proprietary Reverse Mortgages
Larger loan amounts. Compared to other reverse mortgages, proprietary gives those qualified a good amount of money.
No upfront mortgage insurance. The good thing with a proprietary mortgage loan is that you will not have to provide upfront insurance. This makes it easy for many qualified for the loan to acquire and profit from them in a big way.
Unlimited uses of the proceeds. You can use the money to pay for different needs.
No monthly mortgage payments. The loan pays off the existing mortgage, helping you shoulder the burden even though you must pay the property taxes and homeowners insurance.
Cons of Proprietary Reverse Mortgages
May not offer disbursement options. They sometimes do not offer the options for your loan and release it in a lump sum.
Fewer protections. Since HUD does not insure them, it might be hard for borrowers to be protected, unlike other reverse mortgages.
Pros of A Reverse Annuity Mortgage
You remain as the homeowner, and your name remains on the title.
You can use the proceeds the way you want.
When considering the eligibility, the credit score is never a factor meaning you can have other loans and still qualify for the HECM loan.
You can opt-out of the monthly mortgage payments so long as you continue paying the property taxes and homeowners insurance.
You are given disbursement options and you have various options on how proceeds will be received.
Cons of A Home Reverse Annuity Mortgage
They have higher fees compared with traditional mortgages.
You can outlive your proceeds if you select a payment that does not last the loan life.
Your loan could come due if you keep out of the home for a longer period of the year.
The burden of your loan befalls your heir if you die.
To summarize, if you have a home and want to get a loan from reverse mortgages, it would be wise to consult a financial advisor before making a decision. Research more about every type of reverse mortgages and get into the finer details of each.
This will help you make an informed choice concerning the reverse mortgage that will work well for you. All the reverse mortgages can be helpful during retirement, but it is better to choose the one that suits you perfectly.
Disclaimer: This article is meant for educational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.