Retirement can be a time of fulfillment and enjoyment, but it can also be a time of financial stress. Luckily, seniors have many different options to make their retirement years full of positive memories and experiences. One of these options is a reverse mortgage. While a reverse mortgage is not right for everyone, it can be a useful alternative for some. There are many reverse mortgage companies to choose from, and it is vital that consumers be informed before making a decision.
How does a reverse mortgage work?
A reverse mortgage is a financial agreement between a reverse mortgage lender and a homeowner where the homeowner trades some of their home equity in exchange for receiving regular monetary payments. In order to take out a reverse mortgage, you must be at least 62 years old and own your home or have considerable equity in your home. At least one borrower must be living in the home and ensuring that the required property fees are being paid. Many seniors use reverse mortgages to get rid of their mortgage payments, pay off debt, and supplement their income during retirement.
What are the pros of a reverse mortgage?
There are no monthly payments due to the reverse mortgage company. Instead, the loan is due in full when the borrower permanently moves from their home, sells their home, or passes away. This means you can continue to live in your home as long as you wish while still receiving reverse mortgage loans. Some seniors still prefer to repay the loan in part or full to keep their balance low. If this is the route you choose to go, you will not receive any pre-payment penalties. Either way, you can have the peace of mind of knowing that while you are living in the home, you can not default on the loan.
All reverse mortgages are capped at the value of your home. The reverse mortgage you receive cannot exceed the value of your home, which means you or your estate will never owe more than the value of the home. If the loan you receive ends up being larger than the value of your home when the loan is repaid, you and your estate will not be liable to pay the difference.
You will be freed from your monthly mortgage payments. You will be able to continue to live in your home with the bonus of not having to repay the loan. Be aware, however, that the reverse mortgage lenders do not cover other home-related fees such as property taxes, insurance, homeowner's insurance, and maintenance. Dr. Guy Baker, founder of Wealth Teams Alliance and a wealth consultant with over fifty years of experience, says that for many of his clients a reverse mortgage has been beneficial. "A reverse mortgage, for my clients, provided needed financial relief when they had no other alternatives. With a reverse mortgage, they could pay for medical bills and other expenses that they could not have afforded otherwise."
The loans that you receive are generally not considered taxable income. All the loan proceeds from a reverse mortgage are not taxed. Many retirement investments are taxed when you withdraw funds from them, so having a source of money that is non-taxable gives you the freedom to use the funds as you wish.
If your home increases in value, you have the option to refinance your loan in order to receive further funds. If your home increases in value and you would be able to get a higher loan from your home’s equity, you can apply for a further loan and receive further funds.
After the remaining loan is repaid, any remaining equity will belong to you or your heirs. A common misconception is that you are giving your home over to the government; however, this is not true. For example, when the borrower passes away, the home will be sold and the reverse mortgage will be paid back to the reverse mortgage company from the sale of the home. The remaining money from the sale will be given to the borrower’s estate. On this topic, Rob Powell, CEO of Rob Powell Biz Blog states that, “With a normal mortgage, your equity increases as you pay off the loan, but with a reverse mortgage, your equity in the home steadily decreases.”
Government regulations allow you to make informed decisions and protect you from default. An HECM reverse mortgage is government-insured and has the highest standard of consumer safety in mind. All applicants must receive counseling sessions with counselors who are knowledgeable about other financial options and will provide unbiased information about the pros and cons of a reverse mortgage. They also go into detail about the loan process and what your specific responsibilities will be as a borrower. There are other regulations such as limitation of an origination fee and a personal financial assessment to see if you will be able to pay the other fees required to maintain your home.
What are the cons of a reverse mortgage?
If you vacate the home for more than a year, the loan will be due. This could be due to unforeseen health problems that require you to move into a nursing home, for example. When you suddenly vacate the property, you will only have six months to pay off the loan.
Your children’s inheritance will be smaller if you are planning on leaving your home to them. Dr. Guy Baker weighs in by saying, “Family members have to be onboard when a reverse mortgage is taken out on the family home. The kids need to see the reverse mortgages as a way they can avoid having to pay their parent’s living expenses, rather than as a loss of inheritance.” In a reverse mortgage, you are using equity that you already have in your home to receive a loan. When you pass away or move, the reverse mortgage company will get the proceeds from the home in the amount that you owe them, and your children will receive whatever is left over.
The upfront fees are high compared to other kinds of loans. There are many upfront costs that come with a reverse mortgage. Among other fees, these can include an origination fee, real estate closing fees, and an initial mortgage insurance premium.
The flexibility of not having to constantly repay the loan can hurt you in the end by having large fees included in the loan. Ongoing costs can be high because you are charged interest and fees for the current month’s loan as well as the interest and fees that were added to the other month’s loans. Some of the ongoing costs included in a reverse mortgage are interest, servicing fees, annual mortgage insurance premium, property charges, etc.
Is a reverse mortgage right for me?
There are many factors that play into whether or not a reverse mortgage will be right for you. Micahel Drake, owner of PMG Loans asserts that,“Reverse mortgages can be a good idea in situations where someone owns a property with significant equity and is looking for a steady stream of income.” A reverse mortgage can be a quality opportunity to be able to enjoy your years of retirement by turning an asset you have into cash.
To some, turning your home equity into cash may be seen as limiting to your heirs because they will not inherit as much from the family home. While this is important to consider, it is also valuable to look at it in a different light. If you are struggling to make ends meet, taking out a reverse mortgage can grant you more financial independence and lighten your children’s financial burden of helping with your financial constraints.
For a reverse mortgage to make sense for you, you must be in a position where you can continue to pay all the fees that come along with owning a home besides your monthly mortgage, which will be covered by the reverse mortgage company, even if you use part of the reverse mortgage loan to pay off these fees. If you are not going to be in a position to do this, even after you receive the loan, a reverse mortgage may not be a good fit for you.
It may be right for you if are going to be receiving enough money from the reverse mortgage company to solve your current financial problems. This requires reaching out to companies and doing a little digging to see where you qualify. Click here for a list of verified reverse mortgage company reviews.
It may be right for you if you are not planning to move anytime soon. This is important to consider because if you move soon after you take out the reverse mortgage, you will not be able to take full advantage of the loan and, in this case, the upfront fees will likely not be worth it.
Overall, getting a reverse mortgage is a personal decision that requires thought, research, and consideration of the pros and cons. Look at all the aspects of your particular situation in order to determine if a reverse mortgage is the right decision for you.