If you are 62 years of age or older and want to borrow loan against the equity in your home without having to make regular payments, you may qualify for a reverse mortgage. Seniors who lack the money to cover their living expenses may benefit from this mortgage product. Additionally, it can help those who want to diversify their retirement income sources and protect themselves from risks like market declines and outliving their savings.
In addition, getting a reverse mortgage requires you to spend a sizeable portion of your home equity on loan fees and interest. The homeowner, spouse, and heirs may also be at risk of losing money and a place to live due to the loan terms.
Here are four scenarios in which a reverse mortgage may be a wise decision and four in which it may not.
KEY LESSONS
- Even though a reverse mortgage might be the best option in some circumstances, it’s not ideal for all senior homeowners.
- A reverse mortgage might be an expensive option for anyone who is getting ready to move soon due to the upfront costs.
- Prospective borrowers should be aware of how a reverse mortgage might affect their spouses, partners, roommates, and heirs.
- A reverse mortgage can be an excellent tool for long-term financial stability in retirement under the right circumstances.
Contents
When to Consider a Reverse Mortgage
For seniors who comprehend how these loans function and have a strategy for using their equity, a reverse mortgage can be a useful problem-solving tool. Here are four scenarios in which taking out this loan makes sense.
Home equity conversion mortgages (HECMs), which are supported by the Federal Housing Administration, are the subject of the recommendations in this article (FHA).
You don’t move moving soon.
If you’re thinking about a reverse mortgage, you should expect to stay in your home for a while. It generally doesn’t make sense to obtain a new forward mortgage (such as a refinance loan) on a home you’re about to sell. This general rule of thumb isn’t specific to reverse mortgages. The cause? Loan closing costs.
| Typical Reverse Mortgage Closing Costs | ||
|---|---|---|
| Cost | Amount | Notes |
| Loan origination fee | Up to $6,000 | Based on property value and may vary by lender 34 |
| Up-front mortgage insurance premium | Up to 3.0% of the maximum claim amount | Depends on reverse mortgage payment plan 5 |
| Title report and insurance | $1,000 | Borrowers can shop for this service to save money |
| Appraisal | $500 | Cost varies by location and property characteristics |
| HECM counseling | $125 | Fee waived for borrowers who can’t afford it 3 |
| Recording fees and taxes | Varies | Assessed locally |
| Flood certification and monitoring | $60 | Examines flood risk and determines flood insurance requirements 6 |
| Credit report | $30 | Used for borrower financial assessment |
| Repairs | Varies | Required if the home doesn’t meet the FHA’s minimum property standards |
If you plan to move before the loan’s financial advantages outweigh the costs, it might not be financially advantageous to pay these amounts. One of the circumstances that renders your reverse mortgage due and payable is moving. The proceeds from selling your house might not be sufficient to cover your next step, whether it be downsizing, assisted living, or paying a family member to provide care, after paying seller fees and repaying your HECM.
Your spouse is 62 years or older.
A reverse mortgage borrower must be at least 62 years old.
Obtaining a reverse mortgage is not recommended if you are married and your spouse is under 62 years ideal. New laws may protect your non-borrowing spouse from losing the home if you die away first, but after the borrower dies, non-borrowers are not eligible for any money from the loan. That implies that there will be no more credit purchases or installment payments, and the surviving spouse may lose a significant source of income.
Obtaining a reverse mortgage jointly could be a smart move if you and your spouse are both 62 years of age or older and listed as owners on your home’s title.
You can fulfill the necessary material and financial conditions to become a home.
If you have a reverse mortgage, keeping up with your property taxes, homeowners insurance, and home maintenance is crucial. The lender has the right to declare your loan due and payable if you default.
If you don’t pay your property taxes, the county tax authorities may place a lien on your home, seize it, and sell it to recoup the unpaid taxes. The tax authority has a stronger claim to your property than the lender does. You are thus endangering the lender’s collateral, your home, if you don’t pay your property taxes. That’s why lenders require borrowers to stay current on taxes.
Some localities provide home repair assistance and property tax deferral programs to help homeowners 65 and older with their cash flow. Additionally, retirees may receive premium discounts from some homeowners insurance providers.
Additionally, paying to pay your homeowner’s insurance premiums jeopardizes the lender’s collateral. There is no insurance to pay the costs of rebuilding if your house burns down. Your lender doesn’t want to be left holding the bag for a burned-out home that isn’t even close to being worth what you owe.
Your home’s value decreases if you put off maintenance. For instance, failing roofs can result in extensive water damage to your home when it rains or snows.
Prospective lenders will assess your ability to keep these obligations during the reverse mortgage financial assessment that is a required step in the HECM application process.
If you don’t, they will lower the amount you can borrow and place the money in an escrow account so they can keep you up to date on your payments. But to keep a good home, you’ll still need sufficient physical strength, or mental strength plus money.
Your home is merely an asset.
Some homes are sentimental to people. If your family has lived in your home for many years or across several generations, your children may want to keep it that way.
Although there are strategies for heirs to settle a reverse mortgage and keep the house, the loan does pay things more difficult. But if your home is just an asset, the best use of it might be to use it as leverage for a more comfortable retirement.
It is forbidden to discriminate in mortgage lending. There are actions you can take if you believe you have experienced discrimination because of your race, religion, sex, gender, marital status, use of public assistance, national origin, disability, or age. Making a report to the Consumer Financial Protection Bureau or the U.S. Department of Housing and Urban Development is one of these steps (HUD).
When a Reverse Mortgage Is Not a Good Idea
We’ve already discussed some scenarios where a reverse mortgage might not be the best option: you’re wrong of how long you’ll stay in the home, your spouse can’t be a co-borrower, you’d find it difficult to keep the home up, or the home holds sentimental value for your family. Let’s go over some scenarios where a reverse mortgage might not be appropriate for you.
You lack sufficient equity.
You must either own your home outright or have at least 50% equity in order to be eligible for a reverse mortgage. The exact amount of equity required to qualify depends on your age, the payment schedule you prefer, and interest rates. As a result, the percentage isn’t set by law.
You must have sufficient equity so that, after paying off your existing mortgage balance, a reverse mortgage will leave you with a reasonable lump sum, monthly payment, or line of credit (provided you still have one).
You can find out if you have enough equity and how much you could borrow with each reverse mortgage payment option by getting quotes from at least three lenders and going through reverse mortgage counseling. If none offer you the cash you require, a different option might be more beneficial.
Selling your home, for instance, would enable you to cash out all of your equity rather than just a percentage of it (as is the case with a reverse mortgage). A better option might be to rent, buy a less expensive home, or live with a relative.
You have a roommate.
If you die with friends, family members, or roommates who are not also borrowers on your reverse mortgage, they will need to be ready to move if you pass away before they do. If you move the home for a period longer than a year, your fellow residents might also need to leave. (Exceptions apply to qualified non-borrowing spouses.)
Reverse mortgage regulations classify moving into a nursing home or assisted living facility for more than 12 continuous months as a permanent move. Household members need to be aware that seniors frequently move unexpectedly for medical reasons.
Borrowers must use the home as their primary residence in order to live for a reverse mortgage. In fact, in order to prevent foreclosure, borrowers must certify in writing once a year that they live to reside in the home secured by the loan.
Instead of taking out a reverse mortgage, you might want to leave leaving your home to the person who depends on you for housing in your will or trust if you’re comfortable with the arrangement continuing. Including a person on the title of your house won’t protect them from a reverse mortgage foreclosure (and may create new problems, too).
Your home is sentimentally sentimental.
The loan becomes due and payable upon the demise of the final reverse mortgage borrower. The reverse mortgage balance can be paid to the lender by heirs who want to keep the home.
To pay back the loan, they will require cash or a new mortgage.
If your heirs are unable or unwilling to repay back the loan, the lender will sell the home to recoup the debt. Any surplus over the loan balance after the sale proceeds are deducted is given to the borrower’s estate. Federal Housing Administration (FHA) insurance covers any negative balance. The heirs don’t get anything, but they also don’t owe anything.
You face health issues.
Homeowners in their retirement years who have health issues might think about getting a reverse mortgage to cover their medical expenses. However, the loan must be fully repaid if the borrower’s health deteriorates to the point that moving becomes necessary and the home is no longer considered the borrower’s primary residence. A reverse mortgage is probably not a good idea if you might need to move because of your health or disability because the upfront costs are unlikely to pay off in the short term.
In most cases, homeowners who sell or abruptly vacate their property have six months to repay back the loan. Additionally, even though the borrowers may keep any sales proceeds over the loan balance due, thousands of dollars in reverse mortgage costs will already have been paid.
What Are the Costs of a Reverse Mortgage?
The most popular form of reverse mortgages, home equity conversion mortgages (HECMs), come with a number of upfront costs and ongoing expenses. Origination fees, other closing costs, mortgage insurance premiums, along with the interest the borrower accrues on the loan balance, are the most important of these.
Is It Possible to walk a Reverse Mortgage?
You have a few options if you can no longer live in your home because your loan balance is higher than the value of your home. Either perform a deed in lieu of foreclosure or abstain and let the lender walk your property. Since reverse mortgage loans are non-recourse, your estate or heirs cannot inherit their debt.
When Must I repay Off a Reverse Mortgage?
Reverse mortgage loans typically need to be paid back when the borrower vacates the property, sells the property, or passes away. But if you stop maintaining your home or stop paying your property taxes or homeowners insurance, the lender may also demand repayment of the loan.
After I sign, can I change my mind?
According to the Federal Trade Commission, “with most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty” (FTC). “You must cancel the lender written writing of your cancellation. Request a return receipt and use certified mail for your letter’s delivery. This will enable you to prove when and what the lender received. Keep copies of all of your correspondence and any attachments. The lender has 20 days from the money you cancel to return any financing fees you may have paid.”
The bottom line
Whatever your current circumstance, think about how it might change in the future. Under these various scenarios, will a reverse mortgage be beneficial or detrimental to you?
Some people may find reverse mortgages to be a better financial decision than others, and you may also be able to sell your home and downsize. Older home owners might also think about renting, which takes care of issues with homeownership like property taxes and repairs. Other options include forward mortgages like cash-out refinancing, home equity loans, and home equity lines of credit (HELOCs), though they all require good credit and sufficient income or assets to cover monthly payments.
Reverse mortgages, especially the line of credit payment plan, can be advantageous in a variety of circumstances. They can serve as a source of emergency funds or income diversification, pay to the cost of in-home care, and since they are a source of nontaxable income (because the money is a loan), they won’t increase your Medicare premiums or income tax rate.
Even though a reverse mortgage is an expensive and unsatisfactory option, it might still be the best one for your ideal situation. Following are the ifs: If you have a spouse who is 62 years or older, if the loan proceeds will increase your long-term financial stability, if you intend to live in your home for a considerable period of time, if you can afford the ongoing costs of homeownership, and if you don’t intend to leave your home to anyone.
