From the advertisements you see on daytime television, it would seem like reverse mortgages are the easy answer to any senior citizen who finds that he hasn’t saved enough for retirement.
But what exactly is a reverse mortgage?
Despite what the pleasant retirees in the commercials suggest, a reverse mortgage does have risks and drawbacks.
An Introduction to Reverse Mortgages
If you pay attention to those commercials, reverse mortgages are the answer to all of your problems, but as you know, you can’t believe everything you hear on TV.
Here is what you can expect from a reverse mortgage—the good, the bad and the ugly:
Reverse Mortgage Basics:
In order to be eligible for a reverse mortgage, you must be at least 62 years of age. You must own and live in your home, and you must have equity in your home, although it is not required that your mortgage be completely paid off. However, the lender will want to see that you have substantial equity in your home before agreeing to a reverse mortgage.
If you are applying for a reverse mortgage, you’re going to have to go through several steps to secure your loan. The first step is to have a meeting with a HUD-approved counselor, and they can help you decide if one of these loans are right for you and they will walk you through the application process.
At this point, you’ll have to go through a financial assessment in order to qualify.
Unlike a traditional loan, you are not required to pay back the amount of the loan in monthly installments. Instead, the loan plus interest will be due when you sell the house, pass away, can no longer consider the home your primary residence or at the end of the agreed upon loan period.
If you become incapacitated and must stay in a nursing home for a period of time, you have 12 months before the home is no longer considered your primary residence—that is, 12 months before the loan is due.
You can receive the payout from the reverse mortgage in one of five ways. With tenure payments, you will receive monthly payments for as long as at least one borrower still lives in the house. Term payments are monthly checks that will arrive for a fixed period.
A line of credit gives you the opportunity to draw unscheduled payments when you need them in the amount you need them until the credit limit is reached. Modified tenure and modified term payments combine monthly payments with the line of credit option.
The Fine Print:
Not everything about reverse mortgages is good news, however, and it’s very important to enter into a reverse mortgage with your eyes open. You or your heirs will have to repay the loan plus interest at the end of the loan term. The annual percentage rate that you pay can be either fixed or variable, just like in a traditional loan or mortgage. Also, the reverse mortgage may use up all of the equity you have in your home, meaning that there will be nothing left of your equity after the sale of your home.
In addition, the amount of money you are eligible to borrow against your home is dependent on several factors, including the age of the youngest borrower, the interest rate and the appraised value of your house. So even if your home is worth quite a bit, you cannot necessarily count on it being your golden goose.
For example, if all of the factors are the exact same, an 80-year old applicant is going to be able to borrow more money through a reverse mortgage compared to what a 62-year old would be able to get.
As with everything in life, there is going to be some fees which come along with reverse mortgages. A lot of these fees are the same kind of fees you pay with a traditional mortgage. There are three types of fees you’re going to pay:
- Origination fee
- Third party fees
- Mortgage insurance premiums
The origination fee is paid to the lender and they are regulated by the government.
These fees can range anywhere from $2,500 to $6,000 and it’s based on how much your property is worth. The fee is 2% of the first $200,000 value of the property and then 1% of the value above the $200,000.
The next part is any third party fees. This could be anything from title fees to inspections. The price of these is going to vary from company to company.
The mortgage insurance premiums are the last portion. The mortgage insurance is the protection the FHA gives to all of its borrowers. These fee is going to be 2% of the property value.
The biggest concern about a reverse mortgage is why you might need it.
If you are coming to a reverse mortgage because you have not been proactive with your finances and retirement savings, then you want to make sure you educate yourself on how to handle the details. You don’t want your lack of planning to create a mess for yourself or your heirs should money continue to be a problem.
However, as long as you enter into a reverse mortgage with a plan and open communication between yourself, your lender and your family, it can be a positive tool for supplementing your retirement.
Your retirement can be an excellent and fun time of life, but it can also be stressful and taxing. There are a lot of retirees which get a couple of years into their retirement and realize they don’t have enough saved up to get them through.
This is where reverse mortgages can be a useful tool.
When you’re making a big financial decision like taking on a reverse mortgage loan, it’s vital you have all of the information you need to make a wise decision for you and your loved ones.
Hopefully, this has given you a quick insight to the ins and outs of reverse mortgages and can give you the resources you need to conquer a reverse mortgage and reach your retirement dreams without having to pick up a job delivering pizzas.