One of the most controversial mortgages available is the reverse mortgage. There has always been a double-sided debate about these loans among the
This Senior Affair article will uncover the truth about reverse mortgages so you can make the best decision.
Understanding Reverse Mortgages
On the one hand, the
In opposition to these loans are the
A reverse mortgage is a way to liquidate your home equity and receive cash payments in return. These loans are only available to people 62 years of age or older. Unlike a standard mortgage, these loans work in reverse.
Think of a regular or forward mortgage where you borrow a sum of money to buy your property. Now reverse it so that the bank makes payments to you, up to the property's value, with the property acting as collateral.
With a reverse mortgage, the bank pays the value of your home in a lump sum, monthly terms, or line of credit for a chosen time or the remainder of your life. As the payments are received, the home equity reduces.
A reverse mortgage is considered a loan advance and therefore not taxed for IRS purposes. From the lender's perspective, this is a loan to the homeowner with the property as collateral, and the loan becomes due when one of the events occurs:
- The homeowner dies;
- The homeowner moves away; or
- The homeowner sells the property.
Upon any of these events, the lender has a right to recover the principal, interest, fees, and mortgage insurance from the property's value. Any proceeds remaining once they have regained their costs belong to the homeowner or their heirs.
The heirs may choose to pay the mortgage payments to keep the property in some cases. The reverse mortgage is structured so that the loan amount doesn't exceed the property's value so that the estate of the deceased homeowner isn't liable.
So far, it looks like this type of mortgage is a winner for seniors. But there are some downsides.
What are the Costs of a Reverse Mortgage?
Be prepared to pay out some money for the appraisal to start the loan; these are COD or paid in advance for $250 to $1000 depending on your home size; there are origination fees you pay to the lender at the closing, this will get financed so you won't need to worry about it upfront.
What Are the Downsides to a Reverse Mortgage?
Borrowers ages 62 and over can use a reverse mortgage to liquidate their property for cash. As the payments for the borrower are released by the lender, the borrower's equity stake in the property decreases. Although it is marketed as a way for seniors to release liquidity, it does come with some drawbacks.
The biggest drawback comes in the form of loss of inheritance for the heirs. The loan is repaid by liquidating the property in question, usually after the borrower's death. If funds are left over after paying the principal, interest, and fees, they are handed over to the heirs, but nothing is left over for their heirs if the funds are insufficient.
The disadvantage comes in heirs not receiving their inheritance or possibly not having a house to live in after the borrower dies. In some cases, heirs can choose to pay the mortgage to keep the property; however, it depends on their ability to afford it.
One of the reverse mortgage terms requires the borrowers to live in the mortgaged house as their primary residence. If at any point they vacate their premises for a year, the loan becomes payable.
Similarly, since many seniors take a reverse mortgage to pay medical expenses, they should consider that the loan will become payable if they move into a long-term care facility. In addition, the borrowers are required to furnish in writing that the property in question is their primary residence, so relocating or moving to a nursing facility will trigger the mortgage to become due. When considering a reverse mortgage as an option, carefully consider these possibilities.
What Happens If I Outlive My Reverse Mortgage?
Sadly, reverse mortgages are one of the most misunderstood financial products available. Some myths and misconceptions scare seniors out of using their homes as a living source of income.
If you or your spouse live in the house, you cannot outlive your reverse mortgage. However, the loan does not become due until the last homeowner leaves the home permanently.
It is possible to spend all the money in your line of credit. If that happens, then there is no more cash to draw out, but you still own the house and can live in it the rest of your life. You will be required to continue paying the property taxes, homeowner insurance, homeowner association dues (if any), and maintaining the home just like all property owners.
Once the home is vacated permanently, the loan becomes due. The homeowner or their heirs must let the servicing company know whether they plan to keep the house or sell it within 90 days. If the home has to be sold, it must be put on the market. Ninety-day extensions will be granted up to one year to sell the house as long as it is actively being marketed.
Previously, regulations allowed one of the homeowners to be removed from the title to qualify for a reverse mortgage or a larger reverse mortgage. That creates a problem for the homeowner when the borrower dies or leaves the home first. However, new regulations now fully protect the non-borrowing spouse.
Why Should You Never Get a Reverse Mortgage?
The main risk is that you can ultimately lose your home. As we get older, we don't think that we may have to enter a nursing home or retirement home; at this time, the loan is due, and without the means to refinance the loan, it would effectively leave you homeless. So even though you'll be getting the income from your reverse mortgage, you'll have to maintain the home insurance, repairs, and property taxes; this could become too much to handle at some point.
The interest is building up while you are getting these monthly payments or the lump sum payment. And it could be considered more expensive than a traditional mortgage.
It could affect programs like qualifying for Medicaid; you don't want to jeopardize your ability to get benefits, especially as you age.
How Much Money Do You Get from a Reverse Mortgage?
The amount of money you can get from a reverse mortgage depends on your available equity. For example, you can't use more than 80% of the public equity, and that amount won't be more than $679,650.
The exact amount you receive from the reverse mortgage depends on many factors, including your home value, your age, and the interest rate you qualify for. For example, rates can be as low in the 4s or 6s.
You can choose to get those funds in lump sum monthly payments or the popular option of taking a lump sum upfront to take care of the immediate need and then monthly payments for the duration of the loan; some choose a credit line that they can draw off until the funds run out.
Conclusion
A reverse mortgage is an excellent way to access the equity in your home so you can live more comfortably in retirement. Lower lending limits usually allow equity to remain in your home at the end of the loan, but this largely depends on property values and how long the loan was in place. So, for example, your heirs can sell the house when you and your spouse die, pay off the loan, and benefit from the remaining equity. Then, appropriately done, everyone benefits.
