your guide to
buying and
financing a home
®
HandsOnAdvice.com
your guide to buying
and financing a home
Whether you’re a first-time homebuyer or you’re a seasoned pro, purchasing
a house is a big step that can be stressful and overwhelming.
First there’s the matter of finding the perfect home for you and your family.
And after that, there are countless steps that have to be completed: getting
finances in order, setting a budget, selecting a mortgage, preparing for the
hidden costs and much, much more.
In this booklet you’ll find a collection of our most useful tips from
MidWestOne mortgage bankers and the Hands On Financial Advice
website. These simple and actionable articles are designed to help you make
the home-buying process as enjoyable as possible.
Happy reading!
Hands On Financial Advice Team
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table of contents
5 questions to ask when deciding whether to rent or buy a home Getting your finances in order
3
4-5
How to set your budget
6
Mortgage 101
7
Hidden costs of a buying a home
8
Pay off mortgage early or invest?
9
Does it make sense to refinance your home?
10
What you should know about a HELOC
11
Reverse mortgages – get the facts first
12 - 13
HandsOnAdvice.com
your guide to buying and financing a home
5 questions to ask when deciding
whether to rent or buy a home
After saying “I do…” many newlyweds start the home
buying process. Owning a home has always been a part of
the American Dream and one that many people are willing
to work hard for.
This year, first-time homebuyers have a lot to consider
when making the decision to rent or buy a home: interest
rates are still relatively low, there’s still plenty of housing
stock and prices are at or near their lowest in years.
Nonetheless, deciding whether to buy a home or rent
an apartment can be a complicated decision. How do
you know what’s right for you? Potential buyers should
ask themselves several key questions before making this
important decision.
1. What will monthly costs be, and
can I afford the payments?
Keeping your home-related payments under 30 percent
of your monthly income is a good rule of thumb. This
includes your mortgage payments as well as principal,
interest, taxes, insurance and private mortgage insurance, if
required. If you can’t keep mortgage payments below that,
you may be better off renting for awhile.
2. What other debt do I have?
Total rent or mortgage payments plus credit obligations
(such as car loans, student loans or credit card payments)
should not exceed 42 percent of your gross monthly
income.
3. What is my credit score?
Can I qualify for a good interest rate?
A high credit score indicates strong creditworthiness, and
that qualifies you for better interest rates on a mortgage.
For example, someone with a credit score of 740 and above
is going to have less in closing costs. Lower interest rates
also mean lower monthly payments. If your credit score is
low, you may want to delay buying a home until you can
improve your score.
4. How much will taxes, monthly
maintenance, or other fees cost?
Owning a home means you’ll have to pay real estate taxes
and other costs like insurance and maintenance. Most
lenders will require an escrow account for taxes, insurance
and other costs.
5. How many years will I stay here?
Generally, the longer you plan to live in one location, the
more it makes sense to buy. You’ll build equity in your
house and its value may increase over the years.
These are just a few of the many important questions to
consider before deciding to purchase a home. You can
also refer to the Rent vs. Buy Calculator developed by the
American Bankers Association. The calculator compares
the cost of renting versus the real cost of buying a home.
If you have additional questions about the home buying
process, contact your local banker for more information.
HandsOnAdvice.com
your guide to buying and financing a home
getting your finances in order
Whether you’re a first-time homebuyer, or you’re a seasoned
pro, purchasing a house is a big step that can be stressful
and overwhelming.
One of the best ways to reduce the anxiety that often comes
with making such a big purchase is to be organized and
prepared.
Follow our five simple steps and you’ll be fully prepared to
start the home buying process.
Request and review your credit
report.
Your credit history will not only dictate whether you will
receive a loan – it will also determine the interest rate for
the loan. As a result, it’s important to review your credit
before you begin the home buying process so you are able
to address any potential issues as quickly as possible.
The Fair and Accurate Credit Transaction (FACT) Act
allows you to get one free copy of your credit report
every 12 months from each of the three nationwide credit
reporting agencies –Equifax, Experian and Trans Union.
To get your free annual credit report, go through the FTC’s
website at www.annualcreditreport.com, call (877) 3228228 or write: Annual Credit Report Request Service, PO
Box 105281, Atlanta, GA, 30348-5281.
Once you have your report, review the information and
ensure it is accurate. If there are any issues, take the steps to
fix them immediately.
Reduce your debt.
When you apply for a mortgage, one of the things the
lender will look at is the amount of debt you are carrying
and how that compares to your gross work income. This
is referred to as your debt ratio. In other words, the lender
will want to make sure your debt does not exceed a certain
percent of your income. (This percentage is typically
around 38 percent.)
As you prepare to purchase a home, focus on reducing your
debt as much as possible. Continue to make loan payments
on time, pay down large balances on your credit cards and
avoid taking on any additional debts.
Review your budget.
Your lender will want to have a clear picture of your
monthly income and expenses to help them determine
exactly how much money they will be able to loan you.
More importantly – a budget will help you determine how
much you can afford on a monthly mortgage cost.
Review your budget and get a concise picture of how much
money you have coming in and going out. If you haven’t
created a budget, now’s the time. Here’s how you set one up:
• Determine your income.
• Determine your fixed expenses.
• Determine your variable expenses.
• Compare your income to your expenses.
• Adjust as needed.
• Evaluate your budget.
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your guide to buying and financing a home
Continued from previous page.
Get your down payment together.
The more money you are able to put down when you buy a
home, the better your interest rate and the lower your overall
monthly payment. Using your budget, determine how
much money you will be able to use as a down payment for
your new home.
Many experts recommend a down payment of 20 percent
of the purchase price. However, not everyone has that
much cash available. Don’t worry; your lender may be able
to identify other options for you.
Nevertheless, the fact remains that the more you put down,
the lower the mortgage. Low mortgage balances carry low
mortgage payments.
Gather financial documents.
Start pulling together the documents your lender will
want to review during the loan pre-approval process.
These include:
• 2 years of Federal tax returns.
• Most recent 2 years of W-2’s.
• 2 months worth of bank and 401(k) statements and
other assets.
• Most recent 30 days of pay stubs.
With these five steps completed you’ll be ready to schedule
an appointment with your lender to get the credit approval
process started.
As you’re going through this process remember that you
don’t want to utilize all your savings towards a down
payment. In addition to money for every day expenses,
make sure you have at least 2 months’ worth of living
expenses remaining to cover emergencies that may arise.
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your guide to buying and financing a home
how to set your budget
Once you’ve made the decision to purchase a home, the
next big step is figuring out exactly how much you can
afford. This is extremely important, because the dream of
home ownership can quickly turn into a nightmare if you
buy a home you cannot truly afford.
Establishing a budget for your mortgage helps protect your
financial interests down the road. Take the time to consider
the following steps:
Evaluate your financial situation.
Take stock of your finances and determine how much
money you’d like to provide as a down payment on your
home. Make sure you are not completely depleting your
savings. In addition to money for every day expenses, it
is recommend you have at least 2 months’ worth of living
expenses remaining to cover emergencies that may arise.
Consider the future.
Taking your current financial situation into consideration
is important – but there’s more to it. Your future goals and
potential life changes also play a large role in budgeting for
a mortgage. Do you plan to start a family soon? Do you
have children leaving for college? Do you plan on replacing
a car in the years to come? Do you anticipate any changes
in your employment situation?
Also, consider potential future maintenance costs when
evaluating a home. Will you need to fix the roof in a few
years? Will you need to replace the windows, the heating
and air conditioning system, kitchen appliances? Those are
some major cost factors in owning a home, and if you need
to do any of the major projects within a few years of buying
the house, this could impact your monthly budget.
Give yourself a safe buffer by choosing to take out
a mortgage that will accommodate potential changes in
your future.
Review your monthly budget.
Calculate your gross monthly income, which is your
income before taxes and deductions. For example, if your
salary is $40,000, your gross monthly income is roughly
$3,333. Bankers will use this amount as part of qualifying
you for a mortgage.
Next, figure out what your income is after taxes and
deductions. Then, add your debt commitments, including
loans and credit card debt, and subtract it from your
net income. Also, subtract your down payment and the
amount of money you will retain in your savings for living
expenses and an emergency fund. Divide this number
by 12 to determine the amount that is available for your
mortgage payment.
Factor in additional costs.
Once you actually begin looking at properties, keep in
mind that your monthly mortgage payment consists
of more than just the principal and interest charges. In
addition, you must factor the following into your monthly
mortgage payments:
• Real estate taxes – If you have your eye on a certain
home, divide the home’s annual property tax amount
by 12 to estimate the amount you need to pay or set
aside each month. For example, if the property taxes
are $4,200 per year, the monthly amount is $350.
• Homeowners insurance – talk to your real estate agent
or call an insurance agent to receive an estimate on
this cost.
• Private mortgage insurance, often referred to as PMI.
PMI kicks in when you put down less than 20 percent
of the home’s value towards your home purchase and
is designed to protect the lender.
It’s important to keep all these factors in mind when you
are determining your monthly mortgage budget. To help
you with these calculations, take a look at the “monthly
payment” calculator on the MidWestOne website.
Compare your estimated monthly
cost with your income.
Once you have determined a monthly cost for home
ownership, divide that amount by your monthly gross
income. This will result in the percentage of your income.
Many lenders will require that percentage to be no more
than 28 percent.
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your guide to buying and financing a home
mortgage 101
Selecting a mortgage can be confusing, frustrating and
time-consuming. Nonetheless, picking a mortgage may be
the most important financial decision you will make.
Mortgage lenders offer a variety of loans under different
names with different interest rates, up-front costs, and fine
print terms. Take your time to learn about all your options
to ensure you receive a mortgage that best fits your needs at
a competitive price.
What is a mortgage?
Likely the largest debt you’ll ever take on, a mortgage is a
loan to finance the purchase of your home.
Your mortgage consists of a “life” of the mortgage and a
“term” for the interest rate that you choose. The life of the
home mortgage is commonly 15, 20, or 30 years. This
represents the length of time in which your home will be
paid off (if you pay regularly and with the specified amount).
You will also have a term for the interest rate that you pay
on your home mortgage. In effect, this is the time period
over which you’ve agreed to pay at a particular rate of home
mortgage interest (either locked in or floating).
There are many different types of mortgages available on the
market, including, fixed rate, adjustable rate, combination,
graduated payment, and others.
Fixed rate mortgages
The fixed rate mortgage (FRM) is considered by many as
the “traditional” mortgage. Its advantage is that neither
the interest rate nor the monthly payment (principal and
interest) changes over the life of the loan.
There are two main types of fixed rate mortgages:
• 30 Year Fixed Rate Mortgages and
• 15 Year Fixed Rate Mortgages
Other terms (such as 10 or 20 Year Fixed Rate Mortgages)
exist but they are not as commonly used.
The beauty of fixed rate mortgages is that they allow you
to predict what your loan payments will be in the future.
No matter what happens with interest rates, your payments
won’t change. Because these are fixed payments over a long
period of time, the interest rate may be a bit higher.
Adjustable rate mortgage
If you plan to move or refinance in 3 to 5 years, an adjustable
rate mortgage (ARM) might be the better choice for you.
With an ARM, the interest rate can – and probably will –
change periodically during the life of the loan, depending
on interest rates in financial markets. It’s a trade-off. You
get a lower rate with an ARM in exchange for assuming
more risk.
You should review how long you intend on living in this
particular property and weigh the advantage of the lower
payment at the beginning of the loan against the risk that
an increase in interest rates would lead to higher monthly
payments in the future, assuming you still own the property.
With most ARMs, the interest rate and monthly payment
are fixed for an initial time period such as 1 year, 3 years, 5
years, 7 years or 10 years. After the initial fixed period, the
interest rate can change every year. One of the most popular
mortgages is 5/1 ARM. The interest rate will remain fixed,
at the initial rate for the first 5 years, but has the ability to
change every year after the first 5 years.
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your guide to buying and financing a home
Continued from previous page.
Most ARM interest rate changes are tied to changes in
an index rate. This provides you with assurance that rate
adjustments will be based on actual market conditions at
the time of the adjustment. If the index rate rises, your
mortgage interest rate may as well, and you will probably
have to make a higher monthly payment. On the other
hand, if the index rate goes down your monthly payment
may decrease.
One feature of ARM that can help protect the borrower is
interest rate caps.
An interest-rate cap places a limit on the amount your
interest rate can increase or decrease, at any adjustment
period. As you can imagine, interest rate caps are very
important since no one can predict what will happen in
the future.
While there are numerous mortgage products available
these are two of the most common ones. Don’t hesitate
to work closely with your loan officer to learn about all
your options.
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your guide to buying and financing a home
hidden costs of buying a home
As if the home-buying process isn’t overwhelming enough,
there are many hidden costs of purchasing a home that you
should account for in your overall mortgage budget. We’ve
pulled together a quick overview to help you ensure you
don’t overlook any hidden costs.
Closing costs
Closing costs are the various fees charged by those involved
with the home sale. As a rule of thumb, closing costs run
about 2 to 4 percent of the purchase price. They typically
include:
• Appraisal – Your lender will typically expect you to
pay for an appraisal to ensure the purchase price of
the property is equal to or less than the value of other
homes in the marketplace of the same size and type.
• Credit report – you’ll be expected to pay for the
costs associated with pulling your credit report (and
potentially your partner’s report) so the lender can
identify the liabilities that you have and pay on a
monthly basis, which in turn will aid in determining
the interest rate for your loan.
• Title fees and searches – In order to determine the legal
ownership of a property and the liens or judgments
that may be attached to the property, a title search
is performed by a third party. An attorney identifies
any items that must be resolved in order to convey a
clear and clean title to you. The lender will then have
the title guaranteed by the State of Iowa to insure
against errors and omissions. As the buyer, you may
be responsible for both of these costs.
• Attorney fees – In most states, including Iowa, attorneys
are required to be part of the home buying process.
• Recording fees- These are the costs for recording the
deed to the property with the county, showing you as
the new owner and the mortgage, showing that there
is a lien against the property for the mortgage loan.
Inspections
A home inspection is a complete and detailed inspection
that examines and evaluates the mechanical and structural
condition of a property. As a buyer you’ll want to make
sure you complete an inspection before you move into
escrow. In Iowa, you should estimate roughly $400-$500
for a thorough home inspection.
Adjustment costs
Depending on when your purchase actually closes, the
seller may owe you for taxes that you will be paying in the
future on this home. In Iowa, the property taxes are paid in
arrears. When the seller sells their home to you, they need
to pay their proportionate share of the upcoming tax bill,
which reflects the taxes that were incurred while they were
living in the property.
Private mortgage insurance (PMI)
If your down payment is less than 20 percent, you will
likely have to pay PMI. This added cost is usually rolled
into your monthly mortgage payment and may remain
even after 20 percent equity is reached unless you choose
to refinance.
Insurance
Don’t forget about your homeowners insurance. Also,
depending on the location of your new home, you may
also be required to purchase flood insurance.
Maintenance costs
Many people don’t think about short-term maintenance
costs when buying a home, but they should. Whether
buying an older home or a newly constructed home, major
home systems like furnaces or hot water heaters can break
down. By adding this into your monthly budget upfront,
you will be able to address these costs when they occur.
New furnishings and other
related expenses
This is a hidden cost that many people overlook – especially
if it’s your first time buying a home. Will you need to
purchase new furniture, appliances, window coverings or
other items for the home? Make sure you take these into
account in your budgeting process.
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your guide to buying and financing a home
pay off mortgage early or invest?
As you begin to count down the years (or months) to
retirement, you may be one of the many people who
wonder if you should just knock off the remainder of your
mortgage balance so you can live debt free.
This is a question many empty nesters struggle with:
Should you pay off your mortgage early? Or should you
use those extra funds and invest them instead?
Let’s begin by looking at the advantages of paying off your
mortgage early.
The case FOR paying off your
mortgage early
The first and most obvious reason for paying off your
mortgage early is that it will save you money. For every
dollar you pay early, you’re “earning” the interest you would
have otherwise paid over the balance of the loan period. This
means that you’ll end up saving a good amount of money
on interest payments. In addition, the money saved is riskfree and guaranteed, as opposed to other investment tools.
Another big advantage of paying off your mortgage early
is the peace of mind you will have in knowing you are
mortgage free and your home is entirely yours.
With the lower cost of living, the prospect of unemployment
or underemployment is no longer so daunting. You can
now imagine retiring or taking a job that pays a whole
lot less than your previous position without any concerns
about losing your home.
The case AGAINST paying off your
mortgage early
On the other hand, by paying off your mortgage early
you may be giving up on investment returns that might
outweigh your mortgage interest rate. For example, why
pay off a 5% mortgage early when you could be earning
8-10% (or more) on that money? (Keep in mind that these
types of returns are never guaranteed, while mortgage
savings are.)
Also, for many people, their home is a significant portion
of their assets. By prepaying, you are adding more stock
into property, which could result in too much investment
in real estate. By instead investing your money into other
financial tools, you are reducing your overall financial risk
through diversification.
Another important thing to consider when making this
decision is tax deductions. Your tax savings decline the
further you get into the loan, as more money is applied
toward principal.
Nonetheless, if you pre-pay, you are also reducing the
amount of money you could use for tax deductions.
Meet with your CPA to ensure you understand the tax
ramifications of paying off the mortgage in advance.
There are both advantages and disadvantages to paying off
your mortgage early. Make sure you meet with a financial
planner before you decide to prepay your mortgage so you
can determine if it is indeed the best approach for you.
To see how long it might take you to pay off your mortgage,
check out MidWestOne’s mortgage calculator.
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your guide to buying and financing a home
does it make sense
to refinance your home?
As a homeowner, there will more than likely come a
time when you will feel like it is a good idea to refinance
your home. However, it’s important to keep in mind
that refinancing a home isn’t a decision that should be
taken lightly.
There are costs involved with refinancing a home, and it’s
important to consider your long-term plans for the house
before you embark on the refinancing process.
Determining the best time to refinance your home
mortgage can take some time and effort, but if you educate
yourself on market trends, your research might help you
save a lot of money on your mortgage. We’ve put together
some things to consider:
Determine why you want to
refinance
Do you currently have a variable interest rate, and you’d
prefer a fixed interest rate? Do you want to switch from a
30-year mortgage to one that is shorter? Or do you want
to refinance so you can take out equity to pay off debts?
Understanding your end goal is important to determine if
it makes financial sense. Remember – refinancing doesn’t
eliminate debts – it simply restructures them.
Educate yourself
Educate yourself about the different types of mortgage
loans that are available. Different loans are used for
different purposes, such as repaying your mortgage faster,
flexibility, etc.
Seek out a mortgage lender
Find a reliable mortgage lender who you trust and has your
best interest at heart. Your lender should spend time with
you discussing your long-term plans and determining the
best financing options based on those plans. For example,
one of the things to think about is how long you will be
staying in the property.
Check your credit
Seek out your credit report from the three main credit
reporting agencies and check it for accuracy. If you find
inaccuracies, immediately begin the process to correct
them. Your credit report impacts your credit score, which
in turn will influence your refinancing.
Stop applying for credit
If you plan on refinancing your home don’t open new
credit cards or department store cards. New lines of credit
can drive down your credit score and negatively impact
your interest rates.
Crunch the numbers
Determine if refinancing is really going to benefit you. If
you’re switching from a variable rate loan to a fixed loan,
estimate how much you will likely save. Do the same thing
if you’re opting for a shorter-term loan. Talk to your lender,
discuss your options and calculate whether the numbers
will result in an honest benefit. Not a numbers person? Let
us do those calculations for you!
Refinancing a home is a big decision. While it takes time
to determine the best options for you, it can be well worth
the effort.
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what you should know about a HELOC
If you own a home, you may have heard of Home Equity
Loans and Home Equity Lines of Credit (HELOC).
Because a home often is a family’s most valuable asset,
many homeowners use home equity credit lines to finance
major items, such as education, home improvements, or
medical bills.
If you are in the market for credit, a home equity plan
is one option that might be right for you. Before making
a decision, however, you should carefully weigh the costs
of a home equity line against the benefits. Shop around
to ensure you are utilizing the best credit terms without
posing undue financial risks. And remember, if you are
unable to repay the amounts you’ve borrowed, plus interest,
you could potentially lose your home.
Advantages of HELOCs
One advantage of a HELOC is that you are able to pay down
your loan, advance again, and pay down again as you have
the funds to do so. This allows you to simply write a check
to access your line of credit. Only borrow what you need,
when you need it.
Some banks also offer fixed rate repayment options for
HELOCs. This allows you to lock the rate, time period
and payment of your loan. The advantage of this is that
you will have predictable monthly payments that stay the
same for the life of your loan. Also, even though you lock
in a certain amount, you still have the remaining amount
on your HELOC available to you.
The Risks of a HELOC
What is a home equity loan?
Some financial institutions promote a feature on a
HELOC that allows the minimum monthly payment need
only cover interest costs. A loan amount of $30,000, for
example, might only require a minimum payment of $200.
This allows you to float the balance from month to month.
This can create issues over the long run. If you make only
the minimum payment, you’ll never pay off any principal,
and the loan will never go away.
A home equity loan provides a one-time advance and has a
specific monthly payment with a specified repayment time
frame. Flexible terms and competitive rates make this a
convenient way to borrow money.
Also – unless your rate is locked, interest rates on HELOCs
are usually based on the prime rate, which tends to hover
in the single-digit range. A HELOC’s loan rate is variable,
however, and usually rises when the Federal Reserve
increases rates to stem inflation. These increases can come
quickly and may climb 2 percent or more.
A home equity loan is different from your original
mortgage loan. It’s a loan in which the lender agrees to
lend a maximum amount within an agreed period (called
a term), where the collateral is the borrower’s equity in his/
her home. Your equity is the amount you would receive
after selling a property and paying off the mortgage.
What is a HELOC?
HELOCs are similar to Home Equity Loans in that they
use your “equity” in your home for you to use for many
purposes. The difference with a HELOC is the way the
loan works.
A HELOC has a maximum dollar amount that you
are qualified for. This allows you to advance up to your
qualified amount whenever you want. Many banks have
both fixed rate and variable rate HELOCs. The payments
are determined on how much you owe at the time of billing
and there are even interest only HELOCs.
Finally, your home may decrease in value while you’re
borrowing more money. When it comes time to sell the
house or refinance the loan, you may find that the equity
that you had counted on has suddenly disappeared. Avoid
this problem by making sure that the total amount of your
home loans doesn’t equal more than 80 percent of the
house’s market value.
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your guide to buying and financing a home
reverse mortgages – get the facts first
As an empty nester, it’s likely you’ve heard the term “reverse
mortgage” pop up more frequently among your circle
of acquaintances.
Although we at MidWestOne Bank do not offer reverse
mortgages, it is important to understand this type of
mortgage option, to see if it is a viable option for you.
If you’re 62 or older and looking for money to finance
a home improvement, pay off your current mortgage,
supplement your retirement income, or other expenses –
it’s important that you fully understand how this financial
tool works before you pursue it.
What is a reverse mortgage?
With a “normal” mortgage you make regular payments
of principal and interest, to the lender. With a reverse
mortgage, you can receive money from the loan or line of
credit, and are not required to pay it back for as long as
you live in your home, as your primary residence. In other
words – it lets you convert a portion of the equity in your
home into cash, for when you need it.
Unlike a traditional home equity loan or second mortgage,
with a reverse mortgage you are not required to make
regular monthly payments and won’t have to repay the
loan until you no longer use the home as your principal
residence or fail to meet the obligations of the mortgage.
The reverse mortgage is an FHA, federally insured loan
program and is repaid when you pass away, sell your home,
or when your home is no longer your primary residence.
The proceeds of a reverse mortgage generally are tax-free,
and many reverse mortgages have no income restrictions.
Who is eligible for a reverse
mortgage?
To qualify for a reverse loan, you must:
• Be 62 years or older.
• Own your home, or have a low mortgage balance
that can be paid off at closing with proceeds from the
reverse loan.
• Live in your home, as your primary residence.
Due to the complexity of these loans, FHA also requires
you receive financial counseling prior to obtaining this type
of loan.
How much money can you receive?
The amount that is accessible to you depends on a variety
of factors, including:
• The age of the youngest borrower on title.
• The current interest rate.
• The appraised value of the property.
• The cost of the mortgage insurance.
Your lender will use a formula to calculate the exact amount
based on these variables.
How do you receive the payments?
If you determine that a reverse mortgage is the right choice
for you, you will be able to choose from a number of
different payment options.
• Tenure - equal monthly payments as long as at least
one borrower lives and continues to occupy the
property as a principal residence.
• Term - equal monthly payments for a fixed period of
months selected.
• Line of Credit - unscheduled payments or in
installments, at times and in an amount of your
choosing until the line of credit is exhausted.
• Modified Tenure - combination of line of credit
and scheduled monthly payments for as long as you
remain in the home.
• Modified Term - combination of line of credit plus
monthly payments for a fixed period of months
selected by the borrower.
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your guide to buying and financing a home
Continued from previous page.
Benefits of a reverse mortgage
A reverse mortgage can be a powerful financial tool for
retirees:
• Receive cash or pay off debts without having to make
any payments on your loan.
• You will not need cash to cover closing costs. You can
use the money you receive to pay the loan’s closing costs.
• It’s easy to qualify for a reverse mortgage because your
credit score or income stream is not considered.
• Reverse mortgages allow you to stay in the property
for as long as you continue to pay the property taxes
and insurance and live in the property as your primary
residence, even if the outstanding loan and interest
grow to exceed the property’s value.
• Reverse mortgages can be used as an estate planning
tool. For more information on this, consult your
tax planner.
Disadvantages of a reverse mortgage
While reverse mortgages have benefits, they also have some
disadvantages:
• When you take out a reverse mortgage you are losing
equity in your home.
• The money you receive from the loan is not free
money – it has to be repaid to the lender.
• Reverse mortgages can often be more expensive than
“normal” home loans. That is because lenders may
have to wait many years for repayment of any kind.
• It’s a complicated process that can be confusing and
overwhelming. Be wary of people who do not have
your best interest at heart.
As with any other financial product, it’s important you
educate yourself about the advantages and disadvantages
of the tool before you decide if it’s the right choice for you.
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