Loan Origination Fees
Most people choose a Home Equity Conversion Mortgage (HECM) – the are federally insured and are the most widely available reverse mortgage. On HECM loans, there is a 2% origination fee on the first $200,000 and then 1% on the value after that with a cap of $6000.

Non-HECM reverse mortgage loans are available that may have lower origination fees. The key with comparing loans is to look at the total cost. One loan may have lower origination fees but a higher interest rate which means a higher overall reverse mortgage cost.

Mortgage Insurance
With an HECM loan, borrowers are also responsible for mortgage insurance which typically runs 2% of the value of the home. There is also an annual mortgage insurance premium that must be paid and is usually half a percent per year. The mortgage insurance guarantees that the amount of your loan will not exceed the value of your home when your mortgage comes due.

Title Insurance, Appraisals and other Closing Costs
Another similarity between traditional mortgages and reverse mortgages are the additional closing costs. Reverse mortgage closing costs include title insurance, a new appraisal, document preparation fees and possibly an inspection if your home is particularly old or it’s condition is questionable. All of these costs will usually run about a percent or two of the home’s value.

Interest Rate
Just like a traditional mortgage, the interest that you pay over the life of the loan will be your largest reverse mortgage cost. The total cost that you will pay will depend on your interest rate, the amount that you borrow and the length of your loan. On an HEMC mortgage, which is the most common type of reverse mortgage, you can choose between an adjustable rate mortgage that adjusts either monthly or annually and is tied to the 1 Year US Treasury Constant Maturity Rate which fluctuates weekly. For these types of loans the rate is generally the 1-Year Treasury rate plus a percent and a half.

Other reverse mortgage programs offer similar programs where the rate is tied to a particular index (not always the 1-Year Treasury index) with a margin of up to 4% added. Shopping around for the best deal is crucial to finding the best reverse mortgage loan.

Reverse mortgages can be a significant benefit to seniors who are looking to use the equity in their home to pay for the cost of living, medical bills or other expenses. However, reverse mortgage costs must be taken into consideration. Loan origination fees, mortgage insurance and reverse mortgage closing costs can meet or exceed 5% of the total value of the home being borrowed against, and that doesn’t even include the interest rate. With the information we’ve provided in this article you are now aware of the reverse mortgage costs you are likely to encounter. Hopefully this information will benefit you in your search for a reverse mortgage that will meet your needs.

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High Reverse Mortgage Costs
One of the larger pitfalls of a reverse mortgage are the high fees. Fees for reverse mortgages are based on the value of your home, which is different from traditional mortgages where the fees are based on the loan amount. Most reverse mortgages sold are federally insured and known as a Home Equity Conversion Mortgage (HECM). For an HECM mortgage, origination fees alone are usually 2% of the home’s value, and then there is the mortgage insurance premium of 2%. By the time you add an appraisal, title search, title insurance, and other reverse mortgage closing costs the total loan fees can reach 5% or more of the home’s value.

Loan Caps
Since HECM mortgages are backed by the government, they have instituted a limit on the amount that you can borrow. These limits range from just over $200,000 to $417,000 depending on where you live.  So even if your home is worth more than $417,000 the maximum amount the government will allow you to borrow will be limited.

There are non-government insured reverse mortgages available, but just like an HECM, the closing costs are high. The benefit to non-government reverse mortgages is that there is no loan cap and in some instances you can avoid the mortgage insurance premiums.

Equity is Required
Although you do not have to own your home free and clear to obtain a reverse mortgage, you do need to have equity. Although there are some traditional mortgages on the market that allow you to borrow more than your home is worth, that is not the case for reverse mortgages.

Negative Impact on Medicaid
Often overlooked, the impact a reverse mortgage can have on Medicaid is one of the scarier reverse mortgage pitfalls. According to the National Reverse Mortgage Lenders Association, a reverse mortgage that is paid out in a lump-sum can impact Medicaid benefits. In order to avoid this significant reverse mortgage pitfall, the lender needs to ensure that none of the lump sum amount is remaining the month after it is received. Otherwise the remaining amount can count as a resource and will impact Medicaid eligibility.

Age Requirements

Another drawback to obtaining a reverse mortgage is the age requirement. You must be 62 or older to qualify for this type of mortgage. If the home is owned by 2 or more people, all owners must be over the age of 62.
Reverse mortgages are increasing in popularity among senior citizens who are looking to use the equity in their home to pay for medical bills and other expenses. However there are many reverse mortgage pitfalls that need to be carefully considered before taking out such a loan. High closing costs, loan caps and Medicaid considerations as well as equity and age requirements all need to be balanced against the need for income. Hopefully this article has provided some insight into the pitfalls of reverse mortgages and will help you make an informed decision.

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Option ARM mortgages add another layer of complexity to the standard ARM.  With an option ARM mortgage loan, the borrower can choose what “type” of payment they wish to make every month.  The choices, in order from smallest to largest, include a minimum payment, an interest only payment, a payment calculated by a 15 year amortization schedule, or a payment calculated by a 30 year amortization schedule.  The size of these payments are determined by the current level of interest rates in your country.  Here’s a simple explanation of each payment type:

Minimum Payment

A minimum payment is typically about one half to two thirds of the accrued interest on an ARM.  This means that, for a typical $200,000 loan, your minimum payment may only be about $1,000.  Please note though that there is a definite cap to the number of minimum payments you can make.  The cap will depend on the terms of your loan, but its parameters are clearly defined.  Some loans allow you to make minimum payments for six months to three years.  The other cap is determined by something called the “negative amortization level.”  When you make a minimum payment on an option ARM, it is typically much lower than even the amount of interest that has accrued over the month.  The difference between the minimum payment and the accrued interest is then added to the loan’s balance, which is called negative amortization.  Most option ARMs have a negative amortization cap of 110%, which means you are only able to utilize minimum payments until your loan’s balance has reached 110% of the original principal.  It does not take very many minimum payments to reach this cap.  With moderate interest rates, it typically takes a year to reach your negative amortization cap.  Because of this, borrowers who hold an option ARM should try, if at all possible, to avoid making minimum payments.

Interest Only Payment

This is a very cut and dry payment.  It is simply a payment of the interest that has accrued over the course of the payment period.  The cost of the interest only payment can vary by a lot due to fluctuations in the national interest rate, so be wary of economic trends.  Most option ARMs only allow you to make interest only payments for ten years, at which point you will have to make true amortized payments.

Amortized Payment

This is a payment that is based on the amortized interest + principal over the course of either 15 or 30 years.  This payment can and will be dramatically higher than either a minimum payment or an interest only payment because it is taking the loan’s principal into account.  Also, this payment is re-calculated every month depending on the LIBOR.

When you hear in the news about option ARMs “resetting,” what the news anchors are typically referring to is borrowers being forced to make amortized payments.  There are a great deal of risks involved with using an option ARM.  Aside from fluctuating interest rates (which can sometimes double or even triple monthly mortgage payments on its own), option ARMs also naturally, due to negative amortization, increase the base level of risk in holding a mortgage.  When you make a minimum payment on an option ARM, you are literally reducing the equity in your home because your mortgage’s principal is increasing.  An economic  environment with falling housing prices and rising interest rates can be absolute disastrous to holders of option ARMs

So then, who should actually seek out an option ARM?

It only makes economic sense for somebody with a quickly growing income to seek an option ARM.  For example, a junior trader at an equity firm or a first-year accountant can expect to have a rapidly rising income.  The way an option ARM is structured, payments are very low in the beginning and become very high over time.  Only those who can expect quick pay raises should seek an ARM.

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Get contracting experience by working on your own home

Instead of improving your home in the usual “do it yourself” manner, consider hiring carpenters, plumbers, and handymen to do work.  Solicit bids and figure out which companies and firms do the cheapest and best work.  Having construction experience and knowledge certainly helps, but it is just as important that you can efficiently utilize contractors; nobody can complete every job that is required in property improvement.  If you can be a useful, all-around general purpose contractor then you will not only improve your employment opportunities, but you will have the skill necessary to successfully perform property investment.  (A small note here:  This barrier to entry is exactly what makes property investment lucrative)

Build a relationship with a bank

To properly improve a property, you will need to be able to secure construction financing.  Being able to get a mortgage on a property will not provide enough capital to improve the value of the property.  As such, you will have to have bank contacts that are willing to give you an investment property loan to finance your construction work.  It can be difficult to secure this type of financing unless you have general contracting experience.

Start small

To invest in property, ideally you want to stick to property that is being sold in your geographic area.  You will generally have a better idea of the sort of architecture and taste common to the area, and so will have an advantage against national property management companies and investors.  Scour the newspapers for foreclosure sales and tax deed sales.  The ideal property to invest in is one that is being sold at a discount compared to other homes in the area, but that also can be improved at a reasonable price.  This is where your contracting and construction experience will come in handy.  Most foreclosed properties are sold at a deep discount, but most investors will be unaware of the true cost of improving it to a saleable condition.  If you’re aware of these costs and can make intelligent assessments of the cost associated with repairs, you have a gigantic advantage against other investors, and even property investment companies.

Consider your income streams

You will eventually have to pay down the mortgages and construction loans associated with residential property investment.  This can be done either through the outright sale of a property, or otherwise through renting it out.  Unfortunately, the only way to know for sure which option is more lucrative is to do an analysis of your local market.  In some cities, rents can be enough to pay down loans and collect monster profits, while in other cities it will be necessary to sell the property to make any profit.

Keep close track of your accounting

The most important part of property investment is keeping track of costs.  Many people who engage in property investment believe they are making a profit until they do a comprehensive analysis of the costs incurred over the life of the investment.  There are dozens or even hundreds of small costs that will occur over the life of a property investment, and the difference between successful and failure is often simply whether or not these costs are accounted for.  Property investment analysis is critical – by keeping track of your costs, you will also better learn how to reduce them. If you want to learn more about this market, consider attending a property investment seminar. These can be invaluable in terms of giving you background information, and networking in your local area.

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Reverse mortgages are typically only available to seniors. Reverse mortgages are products specifically intended to give income or cash to a person at the end of their life.

There are caps on the value of reverse mortgages. Most countries have some type of cap on money payable on a reverse mortgage.  This is not a concern for most home owners as the cap is in excess of their home’s property, but can seriously affect people who own valuable homes.

It is difficult to predict the worth of a reverse mortgage. Because the approximate value of the mortgage depends literally on how long it takes until you die, it is difficult (and can be emotionally painful) to determine the value of a reverse mortgage.

With all of that said, there are some very definite reverse mortgages pros and cons:

Pros

A reverse mortgage provides much-needed income to a person at the end of their life.  Many people own their home outright but do not have significant savings to cover the costs of retirement.  A reverse mortgage can provide the funds needed to live comfortable at the end of your life.

A reverse mortgage can provide more money and be more comfortable than selling your home and buying a smaller place or renting. Most seniors express little or no desire to move, and a reverse mortgage may be the answer to being able to stay in your home for the rest of your life.

Cons

A reverse mortgage can end up being expensive. Though there are typically no costs for a reverse mortgage, interest (yes, the bank does charge you interest), up front fees, and broker percentages can mean you get much less money than you anticipate.  Additionally, if you wish to receive a lump sum payment rather than fixed income, the bank will apply a steep discount to the funds available.  It does not hurt to consider a reverse mortgage, but if the terms are unacceptable to you there are always other options.

You will lose ownership of your property.  Receiving a reverse mortgage means you will transfer ownership of your property to the bank once you move or die.  If you were planning on leaving your home to your children, this is quite obviously a problem.

Ultimately, you will have to make a decision based on your own unique situation.  There is no sense on sitting on your home’s equity near the end of your life, but a reverse mortgage will not always be the ideal option.

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Firstly, the process of receiving a mortgage takes several months.  What this means is that you can act today to increase your credit score.  To do this is as simple as taking out modest secured loans.  This ‘trick’ has been around for a long time, but it entails taking out a secured loan with one bank, then using the proceeds to take out a secured loan with another bank.  You then make modest interest payments on these loans.  In return, the banks will report to the credit bureaus that you are current on your debts.  Although this seems unrelated to getting a mortgage, this is in fact one of the very best things you can to do help yourself if you have bad credit.  Boosting your credit score in this manner significantly improves the chance that you will receive a mortgage, but also will lower the interest rate you will end up paying and improve the terms of the loan you will receive.  Even a small boost in your credit score will save you literally thousands of tens of thousands of dollars over the life of your mortgage.

Another thing that can help with mortgages for people with bad credit history is to look into receiving a government guarantee or government insurance on your mortgage.  Most countries have a housing or urban development administrative bureau that provides these services.  Most people do not understand that getting a government guarantee or federal insurance can be the difference between receiving a high-interest short-term adjustable rate mortgage and a steady, low-interest thirty year fixed rate mortgage.  Without getting into the specific math, all that you need to know is that a standard mortgage is much, much cheaper than any form of adjustable rate mortgage.

With all of that said, it is still possible to receive a mortgage (however poor the terms) if you have bad credit.  Here’s how:

First, approach a bank you have a relationship with, particularly if it is local to your area.  Banks that you have done business with for a while are much more likely to issue a loan to you, regardless of your credit history.

If you do not have this, it’s time to do some research.  Find banks in your local area that have a history of issuing adjustable-rate or otherwise subprime style mortgages.  Since applying for a loan damages your credit score, it is important that you only apply to banks which you know are actually making the types of loans you are seeking.

If there are no local banks that offer subprime mortgages, then it is better not to apply locally and try national banks.  Note that it can be difficult to receive a bad credit mortgage from a national bank unless the bank is on a campaign to make these sort of loans.

Finally, a word of advice:  Even if you do receive a mortgage while you have bad credit, it is important that you work at improving your credit while you are paying down your mortgage.  It will behoove you to refinance a subprime mortgage as a fixed rate mortgage as soon as possible, and you will be unable to do this unless you improve your credit score.  Additionally, governments will commonly sponsor refinancing programs for specifically this purpose.  You should always be on the lookout for such programs.

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