Advertisements and marketing materials make reverse mortgages look appealing by illustrating what someone can do with the money gained from this venture. What we don’t often see is the full scope and impact this can have on many lives.
Reverse mortgages are not always the appropriate option. Before reaching a decision, attempt to learn as much as you can; familiarize yourself with the ins and outs and pros and cons.
What is it?
A reverse mortgage allows people to essentially convert the equity in their home to cash by borrowing against it. Unlike a regular mortgage, there are no monthly payments, debt increases, and equity decreases. The balance on the loan becomes due when the borrowers pass away, move, the home is sold, or conditions are not met.
To qualify for a reverse mortgage, you must be 62 years of age or older, have considerable equity, and reside in the residence throughout the life of the loan. Other notable criteria include meeting home standards. Mobile homes, for example, typically don’t qualify.
What are reverse mortgages used for?
A reverse mortgage can give older citizens who are on a fixed-income some wiggle room in their budget. Most often reverse mortgages are used for daily living expenses, taxes, medical bills, home renovations, or as a supplement to retirement income.
What are the pros to obtaining a reverse mortgage?
There are obvious benefits to a reverse mortgage. You eliminate your monthly payment and don’t pay taxes on the proceeds, all while maintaining home ownership. You also get to decide how funds are received. Options include a lump sum, line of credit, monthly payments, or a combination thereof until funds are exhausted.
For example, you may opt for an initial lump sum and a line of credit. This gives you the security you need now while helping you avoid paying interest on the entire available balance.
What are the cons of obtaining a reverse mortgage?
As with any loan, a reverse mortgage has stipulations. Conditions include keeping up with home-related expenses including maintaining the home, paying property taxes, retaining homeowner’s insurance, and staying up-to-date with costs, such as HOA fees. If you fail to do this, your loan may go into default and immediate repayment may become due. If you’re unable to pay, your home may eventually be foreclosed.
The other downfall is that reverse mortgages can be expensive. Costs include origination fees, Mortgage Insurance Premium, monthly servicing fees, and third party fees that include appraisals, inspections, closing costs, etc. In addition, the interest that accrues over time can eat away at the equity you’ve accumulated.
What is the most common reverse mortgage used?
The Home Equity Conversion Mortgage (HECM), available through the Federal Housing Administration, is common because it’s generally less expensive and is backed by the government. Because of this, applicants may not have delinquencies on federal debt and must complete a HUD-certified counseling session.
What happens if the house is sold for less than the loan balance?
Reverse mortgages are non-recourse loans. If you owe more than what your home is sold for, you don’t have to pay the difference. The Mortgage Insurance Premium covers that. If your heirs want to keep the home, however, they would have to pay the full loan balance.
What else do I need to know?
If your home is paid off, you still may not be able to borrow against the value in its entirety. The appraised value, interest rate, and the age of the youngest borrower, for example, are all factors that affect how much you can borrow. As of January 2019, the maximum reverse mortgage loan limit is $726,525.
Reverse mortgages are complex and can be costly if you’re unaware of the consequences. Visit aplusfcu.org/balance to gain access to free resources covering a wide variety of topics, including Reverse Mortgages.