Reverse mortgages are becoming an increasingly popular financing offering with our aging baby boomer population, looking for ways to unlock the value from their homes. Simply defined, reverse mortgages are a special type of home loan that lets a homeowner convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. But unlike a traditional home equity loan or second mortgage, no repayment is required until the borrower(s) no longer use the home as their principal residence. The size of reverse mortgage loans is determined by the borrower’s age, the interest rate, and the home’s value. The older a borrower, the larger the percentage of the home’s value that can be borrowed. Homeowners can receive payments in a lump sum, on a monthly basis (for a fixed term or for as long as they live in the home), or on an occasional basis as a line of credit. Homeowners whose circumstances change can restructure their payment options.
Since first offering reverse mortgages, I’ve often been asked, “How do I/we know if a reverse mortgage is right for me/us?” This is a question that has a different answer for different people, based on their individual financial circumstances and needs.. I always start with the same first response, “The first thing I would recommend is that you seek the guidance of a qualified financial advisor”. [Editor - A good first answer!] After having given that advice, I am only too happy to go through the circumstances for the individual borrowers and give them their options.
A reverse mortgage is not an inexpensive loan. The loan fees are based on the maximum credit limit in the US housing and urban development (HUD) lending area for the government Home Equity Conversion Mortgage (HECM). The loan also has an up-front mortgage insurance fee of 2% of the maximum lending limit which also increases the costs. Add to these the normal costs such as appraisal, escrow, title fees, etc., and it’s not uncommon for the costs to get up to $17,000 or slightly more in some of the higher HUD lending areas.
While the costs seem high, the insurances on this loan are more for borrower protection than any other loan the government insures. This insurance protects the borrowers in two ways. Firstly, if a lender ever goes out of business or fails to pay a borrower in a timely manner for any reason, HUD steps in and makes certain that the borrower receives a steady stream of payments. As you read about lenders going out of business, with a HUD insured loan, you never have to worry about whether or not your payments will be made to you. Also, HUD will insure that the borrower will never owe more than the property is worth regardless of how much money the borrower receives over the years, how much interest accrues, or what property values do in the future. Everyone hopes that values will continue to go up, but if the values should fall, the senior borrower and their heirs will never owe more than the property is worth.
So now that you know what the key costs and features are, how can you decide if you should go ahead with the reverse mortgage? If you’re a senior homeowner, ask yourself the following questions:
- Do you find yourself short of funds every month?
- Do you wish you had money to repair your home but don’t and can’t borrow and make payments?
- Are there rising medical costs you can’t quite cover and your insurance doesn’t cover them either?
- Are you making a monthly payment that is keeping you from being able to live your life as you would like?
- Do you wish you could travel, or help a loved one through their education but you just don’t have the funds in the bank to do so?
If you answered yes to any of the questions above, it may be time for you to put your equity to work for you with a reverse mortgage. Now the above questions have to be answered in the right context, because they could be various reasons why you would say yes to them. A reverse mortgage is just ONE solution or source for extra funds, to the above financial related problems. You need to also look at the suitability of a reverse mortgage against your financial and personal situation before making a decision to go forward with it. Here are some examples when it may not be the right choice.
When is a Reverse Mortgage NOT the right choice?
I have seen a lot of good that Reverse Mortgages have done for senior borrowers. I’ve seen them change lives and living situations for the better. I’ve seen people come out of foreclosure with a reverse mortgage and never have to make another mortgage payment. But is there a time when a reverse mortgage is NOT right? Honestly, yes.
There are a few examples I can think of off the top of my head for which I would advise a senior borrower not to get a reverse mortgage. Reverse mortgages are not inexpensive, if you do not intend to occupy the property much longer, that is, you thought you would move soon. In this case, I would advise against a reverse mortgage unless it was the only alternative you had to keep your home out of foreclosure in the mean time.
Some married couples have one borrower old enough to take advantage of a reverse mortgage (you have to be over 62 to be eligible for a HUD insurable reverse mortgage) but the other spouse is too young. In this instance, I see them wishing to quit (claim) the younger spouse off title to obtain the reverse mortgage. I don’t recommend this unless the older spouse is adequately insured so that if the older spouse passes, the mortgage can be paid in full. If not, the loan would be due and payable, and even if the younger spouse was now old enough to qualify for a reverse mortgage, chances are pretty good that he/she would not be eligible for a high enough loan amount to cover the old balance left by the reverse mortgage from the passing older spouse that has accumulated interest. In this case, if the younger spouse did not have adequate funds from another source to pay the mortgage in full, he/she would be forced to sell the home and would be displaced.
I also do not recommend a reverse mortgage to those whose health is so bad that, they know there will not be at least one borrower able to stay in the home. Once all borrowers on the original loan are out of the home for a period of 12 months, which includes nursing homes, the mortgage becomes due and payable.
There is no income qualification for a reverse mortgage, however, if you know that even with the relief you gain from a reverse mortgage you cannot afford the taxes, insurance and upkeep on your property, then I would suggest you look at other alternatives. Reverse mortgages require that the borrowers still pay all the taxes, insurance and maintain the property in reasonably good condition. If your monetary needs are temporary, then the costs of a reverse
mortgage may not make it the best option.
There is also a lot of information also available at the official HUD website regarding this topic. Do your research and really look at your current and future circumstances to determine whether a reverse mortgage is right for you.