If you own your home for many years, it generally grows equity as you live in it. Equity loans and lines of credit have always been popular, but reverse mortgages are a relatively new option. These types of mortgages have increased more than 1,300 percent between 1999 and 2008. (1) But what makes them so attractive? What should you consider when thinking about a reverse mortgage in Texas?
What is Equity?
Equity is a term used to describe the amount of your home that you own. When you first start paying down your home, you pay mostly interest to the bank. This is because interest payments go to the bank to pay for the privilege of borrowing money from them.
The principal part of your payment goes to paying off your home. If you look at your loan statement, you can see how much you pay toward principal and interest for each payment you have made.
Over time, most loans allow you to pay off more of the principal each month. Your payment each month stays the same, but the interest portion you pay is less. The principal amount you pay each month increases. So, over time, you own more of your home.
The equity you own depends on how much loan you have paid along with your home’s value over time. For example, when you have paid off 80% of the value of your home, you can say that you have 80% equity in your home.
So if you need to remodel your kitchen and you would like to borrow the 80% you own in your home, you have options. You can use the equity in your home to pay for the construction to make your kitchen up to date.
How Do I Borrow Equity From My Home?
Depending on your age, income, and credit score, there are three options to borrow equity from your home. Each has its pros and cons. Besides the conventional home equity loan and line of credit, there is now a reverse mortgage option.
If you are age 62 or older, you can consider a reverse mortgage. These are also known as home equity conversion mortgages (HECM). For this type of mortgage, you must have considerable equity in your home. You also must be willing to part with your home instead of leaving it to your heirs.
When you apply for a reverse mortgage, you ask the bank to pay you back the equity in your home. Then, you stop making mortgage payments and start receiving them. In addition, you may stay in your home along with your spouse (unless you break the terms of the reverse mortgage).
However, there are some important considerations to look at before signing on the dotted line.
First off, there are terms to each reverse mortgage that outline when you can lose your home to the lender. Stipulations causing you to lose the home can include if you:
- Stop paying your home’s taxes
- Don’t make required repairs on your home
- Fall behind on your home insurance payments
- Choose to sell your home
- Move and stay gone for a certain number of months
- If your spouse is not on the mortgage and you pass away
A reverse mortgage accumulates interest charges over time, and there are also lender fees and closing costs associated with taking this type of mortgage out.
Reverse Mortgage Fraud
For a reverse mortgage loan, it is imperative to consult your attorney. Many predatory lenders are operating in the US that target older adults with this type of mortgage. According to the FBI, you should follow these precautions when thinking about a possible reverse mortgage:
- Do not respond to unsolicited advertisements
- Be suspicious of anyone claiming that you can own a home with no down payment
- Do not sign anything that you do not fully understand
- Do not accept payment from individuals for a home you did not purchase
- Seek out your reverse mortgage counselor
What Factor Should I Consider?
There may be drawbacks to choosing a reverse mortgage for your situation. Depending on whether you can reliably continue to pay your home insurance, keep your home in good condition with needed repairs, and continue to pay your taxes, this could be a good choice.
Another consideration is how much equity you own in your home. If you own 90% equity in a $500,000 home and manage your bills but want the reverse mortgage to help out a son who needs home repairs, this may not be the best choice for you. Your heirs could lose the home as an inheritance just to gain $20,000 right now.
As with any big decision, it is best to consult with your attorney before jumping in.
We Can Help
Talking with us at Jarrett Law can bring you peace of mind about your decision. We focus on real estate law and know the ins and outs of the contracts used in mortgages, deeds, buying, and selling of homes. We’d love to work with you to help you make the wisest decision in your particular situation. Contact us to find out how we can help.
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