Have you ever heard of someone being “House Rich & Cash Poor?” This is becoming a more common occurrence as wealthy senior citizens enjoy the benefits of having paid off most of their mortgages over the years. They have a very valuable cash cow in their dwellings based on the home equity.
An additional advantage is that Texas home values have appreciated tremendously over the last couple of decades. Most older homeowners are amazed at the asking price for their old home sweet home. All of this built-up home equity can be extracted using reverse mortgages.
For while Texas grandparents may be asset-rich, they might not have much cash flow for day-to-day expenses. Grandparents may want to buy a special graduation gift, pay for a well-deserved vacation or make some important home repairs. Most reverse mortgages will provide a line of credit to homeowners. But who pays for homeowners insurance during reverse mortgages?
When you start considering reverse mortgages, you might be confused by some of the terms. You can qualify for non-profit, for-profit or governmental reverse mortgages. You can get adjustable rate or fixed rate reverse mortgages. Two more terms to pay close attention to are 1. Mortgage Insurance and 2. Set-Aside.
Aren’t mortgage insurance and homeowners insurance the same? The terms sound eerily similar, but are actually quite different. Mortgage insurance is a financial protection for the bank against you defaulting on the loan. Homeowners insurance is a financial protection for you, your property and belongings.
Of course, with a normal mortgage, the homeowner pays for the homeowners insurance. The truth is that this does not change under the reverse mortgage. The homeowner will still hold the title for the property with a reverse mortgage and will be responsible for home repairs, taxes and homeowners insurance. That is why when calculating a reverse mortgage, it is wise to include these expenses in the total.
Lenders will usually conduct a financial assessment of your home value, including property taxes and homeowners insurance. Lenders might establish a “Set-Aside” fund where the money for the loan is locked in for paying taxes and insurance. The lender does not want the reverse mortgage to overburden the homeowner. Homeowners insurance, mortgage insurance and normal mortgage payments will still be made by homeowners.
Setting up a reverse mortgage line of credit could help with much-needed home repairs. You want your house to be in good shape to retain the highest resale value. You can usually withdraw a lump sum at the beginning of the reverse mortgage for home repairs. So, while it may be advantageous to withdraw a portion of your home equity with a reverse mortgage, you will need to carefully review the origination charges, service fees and closing costs.
While reverse mortgages may be ideal for some Texas property owners, they may be overly burdensome for others. Your homeowners insurance policy is just one issue that may lead you to have second thoughts about whether a reverse mortgage is right for you.