Reverse mortgages have existed for a few decades, but only recently have they received a significant amount of press. Touted as a way for senior citizens to utilize the equity in their homes, reverse mortgages have become increasingly common. But is a reverse mortgage right for you?
As the name suggests, a reverse mortgage is pretty much the opposite of a regular mortgage. Instead of taking out a loan to buy a home, you put up your home as collateral and receive money. But unlike a home equity loan, you do not have to make monthly payments. No payment is due until the borrower dies, sells the home or moves out for twelve months or more. When one of these events occurs, the loan must be paid in full, including accrued interest. This is accomplished by selling the home or obtaining a traditional mortgage.
The proceeds of a reverse mortgage may be distributed in a few different ways. The borrower can take a lump sum payment. He can request a line of credit to use as needed. Or he can elect to receive monthly payments. Some lenders will even allow you to receive payments by two different methods, such as half in a lump sum and the other half as monthly payments.
Requirements for a Reverse Mortgage
Unlike other mortgages, a reverse mortgage does not subject the borrower to income requirements. Since there are no monthly payments, there is no need to verify income. The amount a homeowner is eligible to borrow is dependent on the equity he has in his home.
There are, however, a few requirements that must be met. These include:
* The borrower must be at least 62 years of age. If there is a co-owner who is under 62 years old on the home’s title, that person’s name must be taken off before the loan can be made.
* You must have a certain amount of equity in your home. If you have an existing mortgage, it must be paid off. But you can use the proceeds of the reverse mortgage to do this.
* There are certain criteria that the home must meet to qualify. The owner must live there, and if it’s a multi-family dwelling, there must be four units or less. Manufactured housing must meet certain requirements to qualify.
* Before a reverse mortgage can be made, the borrower must undergo counseling approved by the Department of Housing and Urban Development (HUD). The purpose of this counseling is to make sure the borrower understands how the reverse mortgage works. When completed, the borrower receives a certificate that must be presented to the lender.
A reverse mortgage can provide funds to senior homeowners to use any way they choose. They do not have to make monthly payments, and they can remain in their homes for the rest of their lives or until they choose to move out or need to do so for long-term care. But it’s very important to understand all of the implications of a reverse mortgage before making a decision.
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In general, we have two options when it comes to having a place to live. We can rent a dwelling that someone else owns, or we can buy a place of our own. Home ownership is touted as the “American Dream,” but whether you should rent or buy depends greatly on your individual needs and financial situation. Here are some things to consider about both options.
Advantages of Buying
* When you purchase a home, it is yours to do as you please with it. The terms of your mortgage may prevent you from renting it out or doing anything that would decrease its value, but you can remodel, add on and redecorate to your heart’s content.
* Buying a home allows you to build equity that may be leveraged for other purposes. Once you’ve paid down your principal balance, you may be able to obtain a home equity loan if needed.
* Home ownership carries a number of potential tax advantages. You can get a credit for things like mortgage interest, home improvements, installing energy-efficient heating systems and more. Consult a tax professional to find out if you qualify for such benefits.
* Real estate usually increases in value over time. This is called appreciation, and it can work to your advantage by increasing your equity without extra payments.
* If you get a fixed-rate mortgage, you won’t have to worry about your payments going up over time. When renting, your monthly payments are likely to increase due to inflation.
Advantages of Renting
* When you rent, the landlord is responsible for repairs. This can save you a great deal of money.
* You don’t have to worry about making a down payment. You may have to pay the first and last month’s rent and a deposit, but this is nothing compared to the tens of thousands of dollars usually required as a down payment on a mortgage. You also don’t have to worry about closing costs.
* Moving is much easier when you rent. Instead of trying to sell your home, collecting the money, and finding a place to stay until you buy another one, all you have to do is wait until the lease is up and give adequate notice.
* In general, renting costs less per month than buying. Rent is often less than a mortgage payment itself, plus you don’t have to pay real estate taxes, homeowners insurance or private mortgage insurance.
Whether you should rent or buy depends on several factors, some of them financial and some not. Whatever you decide, it’s important to be aware of the advantages so that you can take full advantage of them, and the disadvantages so that you won’t be taken by surprise. If you’re in doubt, you can always rent a place with a short lease while you’re deciding.
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When thinking of ways to earn income without working by the hour, becoming a landlord often seems like the perfect option. Those who are retired can supplement their income without going back to work, and those who need extra money can get it without working longer hours or going back to school. But being a landlord is not as easy as it may seem.
Still, renting out properties can be lucrative. Here are ten tips to help you get started.
1. Be aware that financing for rental properties is much different than financing for a home you intend to live in. It requires a much larger down payment, and interest rates are usually higher. If you have a home that’s paid off, you might do better to buy a new one for yourself and rent the old one out or take out a home equity loan to purchase the property. A knowledgeable real estate agent can help you decide.
2. Look for deals on investment properties. Foreclosure sales are a good place to start. You can often find homes that have been foreclosed on in good condition for rock bottom prices.
3. Beware the fixer-upper. Buying a property that needs work might seem like a good way to get a deal if you can do the work yourself, but such properties often end up costing you more than you think. If you choose to buy a fixer-upper, be sure to have it inspected and get estimates on needed repairs (or the supplies to do them yourself) before proceeding.
4. If you want to start making money right away, consider buying a property that already has tenants. They’re harder to find than empty ones, but they are out there. Just remember that you will be required to abide by the terms of the current lease until it runs out.
5. Decide how much you will charge for rent. You need to make enough to cover your costs and make a profit without charging so much that you won’t be able to find a tenant. Consider your mortgage payment, taxes, insurance, and estimated average monthly repair costs. Then do some research to make sure your rate is competitive.
6. Decide whether or not to utilize a property manager. Hiring one will eat into your profits, but it will also keep you from having to deal with repairs and maintenance.
7. Write up a rental contract. There are contract templates available online, but it’s best to have a real estate attorney help you with this. He will know all of the ins and outs of landlord/tenant law.
8. Find tenants if you don’t already have them. Place ads in the classified section of the local newspaper, put fliers up around town, and advertise online on sites such as Craigslist. If you live in a college town (and are not opposed to the idea of having college students as tenants), place some fliers around the school to get a quick response.
9. Screen potential tenants carefully. It’s a good idea to get a criminal background check and some references. Renting to criminals or bad renters is not a good way to start out your career as a landlord.
10. Be aware of your responsibility to provide notice for such things as inspections, maintenance and eviction. The requirements should be outlined in your contract and must be in line with state law.
There is a lot involved in becoming a landlord. But it’s a great way to make money with little ongoing effort. You will have some responsibilities, but if you take the time to choose good tenants, things should go fairly smoothly.
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