Reverse Mortgages have been popularly marketed as a great means of getting cash for senior citizens for their daily expenses or to add to their retirement funds. Do be careful when you do try out a reverse mortgage as it can lead to foreclosing your home if done wrong.
To start off:
What is a Reverse Mortgage?
Reverse Mortgage is a type of home equity loan catered to old homeowners. It doesn't require monthly mortgage payment and the payment for home equity comes out usually in a monthly way. For example, a 64-year-old homeowner who has a considerable amount of home equity may borrow against the value of their house. He/She will either then get the funds through a lump sum, fixed monthly payment, or a line of credit.
Who Can Apply for Reverse Mortgage?
- Homeowners above 62 years old
- Legally owns a home or have a low mortgage balance that can be paid with the loan proceeds.
- Have the financial capacity to pay for upkeep
- Have the financial capacity to pay for tax and insurance
- Must live in the home for the duration of the loan
Types of Reverse Mortgages You Can Apply To
- Single-purpose reverse mortgages - are the least expensive option. It's offered by state & local government agencies and non-profit organizations. The downside is that the loan may only be used for one purpose. This purpose must be specified by the lender. Homeowners with low or moderate income are qualified to take these loans.
- Proprietary reverse mortgages - are private loans by the companies that develop the house property. The more high-valued your home is, the bigger the loan advance you get from a proprietary reverse mortgage.
- Home Equity Conversion Mortgages (HECM) - is the most popularly used among the three. It's a federally-insured reverse mortgage under the U.S Department of Housing and Urban Development (HUD). unlike single-purpose reverse mortgages, HECM loans can be used for any purposes.
Among the three the HECM is the most popularly chosen type of reverse mortgages. But do keep in mind that you are required to seek a loan counselor to discuss your reverse mortgage options. It's also good to have a financial advisor for a reverse mortgage.
Pros of Reverse Mortgages
- A good source of income - Reverse mortgages is a good source of income for you until the day you die. You can get it by monthly regular payment or a lump sum.
- It's generally tax-free - Just consult with a tax professional for personal factors that will affect your final tax treatment.
- They generally don't affect Social Security or Medical payments - Generally, you don't get penalties relating to members receiving payments from any types of program.
- The money you owe won't go higher than the value of your home - Reverse mortgages have a "nonrecourse" clause, which prevents the borrower from owing more than the value of the home.
- A great option to reduce expenses - You can seek experts and find out how to buy cheaper homes using reverse mortgages.
- Flexible - Reverse mortgages can be used in various ways. You can use it to pay off some expenses, retirement fund, buy a new home, etc…
- You can stay at home while adding income stream - This is what attracts senior homeowners to reverse mortgage. You are able to live in your home all while getting money off of it.
- You get to keep your home for the rest of your life - As long as you pay your taxes and insurance and keep the home in good condition.
- Low risk of default - There is no risk of your home being taken for nonpayment reasons. You don't have to pay for the loan unless you permanently leave it. However, you still need to pay your upkeep, taxes, and insurance.
Cons of Reverse Mortgages
- You may outlive your equity - That's why it's advisable to only use reverse mortgages as a means to be able to stay at home while getting a monthly payment to use for retirement life.
- Your heirs won't inherit the house - In order to pay off the loan, the lender will sell off the house. But the heirs have the option of buying it from the lender. If you want your heirs to inherit your home then you should refrain from getting a reverse mortgage.
- Application fees are generally expensive - Lenders charge origination fee and high closing costs compared to conventional loans.
- Reverse mortgages are adjustable rate products - Depending on the market it could be good or bad for you. Adjustable rates affect the cost of your loan over time.
- You can't move out from your home, if you do, your loan becomes due - If you are in a health risk then reverse mortgage could be a risky product for you.
- Accumulating interest - Although there are no monthly payments, the loan amount you will pay back increases due to interest. Thankfully the money you owe will not exceed the value of your home.
- Limited cash - If you have a lot of home equity, know that the amount of money you can borrow is limited. The current loan limit set by HECM is $679,650.
- You must keep the home well-maintained, as well as pay the taxes and insurance to avoid foreclosure - You need to keep the home well-maintained to keep its value come time to pay off the loan. And it's your job as the borrower to keep it maintained. Which means expenses for you. You also need to pay for insurance and tax. If you fail to pay, it may cause your loan to become due and payable.
Reverse mortgages are a great financial tool to increase your income or add to your retirement funds. All while keeping your home provided you pay for its maintenance and other expenses. It can also be used for other expenses like repairs and medical. But do note that you will leave your heirs without a home to inherit. You also need to consider your financial situation before considering a reverse mortgage or you might end up losing your home with a financial mistake.