- Understand how a reverse mortgage works.
- Review pros and cons of reverse mortgages.
- See if getting a reverse mortgage is the right choice to meet your cash flow needs.
What is a Reverse Mortgage?
A reverse mortgage is a unique mortgage because there are no monthly mortgage payments required from the borrower. A reverse mortgage borrower, however, must continue to stay current on payments for property taxes and homeowner's insurance or risk losing the home. A reverse mortgage loan is designed to give older homeowners the ability to receive tax-free income without having to make mortgage payments, sell their home, or affect their hold on their title. For homeowners age 62 and older, a reverse mortgage can be the right way to receive either extra income or to reduce the homeowner’s monthly costs of living.
Repaying the Reverse Mortgage Balance
The reverse mortgage balance is repaid when the borrower ceases to live in the home, from selling the home, moving out so that the home is no longer the primary residence, or by passing away. In any of these cases, the lender receives the proceeds of the sale of the home to pay off the balance of the reverse mortgage loan. If the proceeds of the sale exceed the outstanding loan balance, the difference is paid back to the borrower or to her estate. If the proceeds of the sale are not sufficient to repay the lender, it is the lender who suffers the loss, not the reverse mortgage holder or the mortgage holder's estate.
Counseling Required
A unique aspect of the reverse mortgage is that counseling is required for all prospective borrowers considering a reverse mortgage loan. All lenders are required by law to provide this counseling to insure that the homeowner is aware of all the terms and conditions of the loan, and that the homeowner has closely considered whether or not a reverse mortgage loan is the best choice.
Reverse mortgages can be taken either as a line of credit or as a lump sum. As a prospective borrower, you should first consider how you will use the proceeds and whether it makes sense to receive the cash over time or all at once.
The reverse mortgage industry is heavily supported by HUD (US Department of Housing and Urban Development); a large majority of reverse mortgage loans are insured by HUD's Federal Housing Administration (FHA). The FHA's reverse mortgage product, called the Home Equity Conversion Mortgage (HECM), is the dominant product in the market. The support and oversight that the FHA provides to the reverse mortgage market is another benefit for potential borrowers.
Reverse Mortgage Fees
Fees on a reverse mortgage are generally higher than on traditional mortgages. Think carefully about the costs involved, before choosing a reverse mortgage. For instance, you want to make sure that you plan to remain in your home for at least a few years, so you avoid throwing away money on loan fees when the benefits you will receive are limited. If you can afford the monthly mortgage payment that would come with a traditional refinance, it is likely a better choice for you than a reverse mortgage. In my view, a reverse mortgage is ideal for a senior that wants to remain in his or her home but can no longer afford the monthly mortgage payment or for a senior that is cash poor and house rich but cannot qualify for a traditional mortgage.
Who Qualifies?
Reverse mortgages are available to homeowners 62 years old or older. Neither income nor credit history is considered by lenders in determining who qualifies, which is another big benefit of a reverse mortgage. The most important qualification criteria for reverse mortgage lenders are the age of the homeowner, the value of the home, the amount of available equity in the home, and the current interest rates.
The amount that a homeowner can borrow in a reverse mortgage is tied to the homeowner's age. While you have to be 62 to get a reverse mortgage (and if there is more than one person on title, then both must be over 62 to get a reverse mortgage), you are restricted to borrowing a smaller amount when you are closer 62.
What Else to Consider?
You will never need to leave your home once you get a reverse mortgage, unless you choose to do so. Even if you "out live" your loan, the lender will not be able to take the home or force you to leave.
One very important consideration for prospective reverse mortgage borrowers is by taking out a reverse mortgage, you will be using up part or all of an asset that might otherwise be left to children or other heirs. Since the interest that you will incur on the loan is added to the balance of the reverse mortgage against your property, your equity is usually eroding (unless the value of the home is increasing at a rapid rate), and there will be less equity available when the lender actually sells the property. If you want to leave your home to your kids, you should carefully consider if your heirs will have the means to remain in the property, as they will have to pay off the entire reverse mortgage balance (perhaps by getting a loan) in order to stay in the home.
If you have a traditional mortgage and you are eligible for a reverse mortgage, the proceeds of the reverse mortgage will first be used to pay off your current mortgage balance. Make sure this is included in your calculation for how much cash you will receive.
Be cautious about any sources that offer you reverse mortgage advice. Choose your lender carefully, by comparing the costs from at least two different reverse mortgage lenders. Although much has been done with federal laws in the last five years to prevent fraud and other abuses against older homeowners through reverse mortgages, there still remains a risk and potential borrowers need to be thorough in their research and confident in their decisions.
A reverse mortgage can be the right loan for many homeowners, but it is not suitable for all. The younger you are, the more careful you should be about drawing on your home's equity The proceeds of your reverse mortgage do not need to be used in any particular way; you can use them as you please for any personal need, such as used for home improvements, to pay bills, to invest, or to use for a vacation. We advise you to be prudent in how you use the proceeds of your loan, as you are spending money taken from your equity stake in your home. Once you spend the reverse mortgage proceeds, you may have used up all your equity.
What Should I Do Next?
Find reputable reverse mortgage lenders — Bills.com has put together a network of the most reputable reverse mortgage lenders in the country and you can access them through this quick reverse mortgage form. Also, be sure to continue your research and take advantages of this additional reverse mortgage information on Bills.com:
Since you don't have facebook, please provide us with your location and a valid email address so we can answer it. Without a valid email address,we can't reply. (Go back to login with Facebook)
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
We get a lot of comments! To help us show our boss that this is a valuable service, so we can keep providing it, we ask you to do 2 things before commmenting:
Log in
Like us
Submit your comment!
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
Thank you for your comment. Your comment will be posted shortly.
No Comments