A reverse mortgage can give older homeowners the funds they need to meet their living expenses. While this may certainly sound like a good deal, there’s a lot to consider before taking the plunge. Here’s how reverse mortgages work, who’s eligible, and who should (and probably shouldn’t) get one.
Reverse mortgages, explained
A reverse mortgage is a type of loan that allows you to “leverage the equity in your home.” Kiplinger explains. Let’s say you’ve put a lot of money into your home through mortgage payments, or you own outright, or you’ve paid off most of the mortgage and therefore have equity. If you’re planning to sell your home and downsize, that equity comes in very handy. But if you plan to stay in your home, as many seniors want to do, your equity tied up may be limited. This is where reverse mortgages come in. the borrower already owns the home and they borrow against it while retaining title and ownership of the home. Think of it as a “conventional mortgage where the roles are reversed,” he explains Forbes:. The bank will lend you money upfront, and then you’ll eventually pay back that borrowed amount (known as the principal), plus interest.
The difference between a traditional mortgage and a reverse mortgage is that the borrower will pay no interest over the life of the loan. Instead, principal and interest will be paid all at once at the end of the loan term. Because of this delayed repayment date, reverse mortgages are often not repaid by the borrower; The borrower’s heirs often sell the property to pay off the loan after the borrower either moves or dies.
Reverse mortgages are most often provided through government-insured programs, the most popular type being the home equity conversion mortgage (HECM), which is backed by the Federal Housing Administration. Private lenders may offer reverse mortgages, but they are not federally insured and are more likely to expose the borrower to fraud. Forbes:.
Who can get a reverse mortgage?
They are only available to owners who are at least 62 years old. According to the Consumer Financial Protection Bureau, borrowers must meet other requirements. They should.
- live in the house they borrow from
- either own the home outright or have a low balance on the mortgage that they need to pay off when they close on the reverse mortgage.
- has no federal debt
- keep their house in good condition
- Get advice from a reverse mortgage counseling agency approved by the United States Department of Housing and Urban Development (HUD).
There is also an application process. The bank will want to make sure you have enough equity in your home and that you have enough funds to continue paying expenses such as property taxes, homeowner’s insurance, homeowner’s association fees, and general property maintenance.
How much can you borrow with a reverse mortgage?
It depends on interest rates, your age, and the lower of your home’s appraised value or HECM mortgage limit. Agreed Kiplinger, “[g[generallythelowertheinterestrateandthehigherthehomevaluethemoremoneyyoucanuseNotethatitisnotpossibletousetheentireequityinyourhome[g[enerallytheolderyouarethelowertheinterestrateandthehigherthehousevaluethemoremoneyyou’llbeabletotap”Notethatit’snotpossibletotapalloftheequityinyourhome[g[ընդհանուրառմամբորքանմեծեքայնքանցածրէտոկոսադրույքըևորքանբարձրէտանարժեքըայնքանավելիշատգումարկարողեքօգտագործել։Նկատիունեցեքորհնարավորչէօգտագործելձերտանամբողջկապիտալը:[g[enerallytheolderyouarethelowertheinterestrateandthehigherthehousevaluethemoremoneyyou’llbeabletotap”Notethatit’snotpossibletotapalloftheequityinyourhome
You can get the funds in a lump sum, monthly payments, or through a line of credit. You also have the option of using a combination of these methods.
What costs are involved?
There are a number of notable costs associated with reverse mortgages.
- Mortgage insurance premiums. For federally insured reverse mortgages, there is a 2 percent upfront mortgage insurance premium and a 0.5 percent annual premium thereafter, according to Forbes:.
- Origin fee. In addition, borrowers may pay a loan origination fee. According to HUD, lenders can charge “the greater of $2,500 or 2 percent of the first $200,000 of your home’s value plus 1 percent of the amount over $200,000.” However, these fees will not exceed $6,000.
- Service fee. Lenders may also charge a fee for servicing the loan over the life of the loan, which can include tasks such as sending account statements and disbursing loan funds. This fee will be no more than $30 or $35 per month, depending on the amount of interest on the loan.
- Third party fees. Other costs may add up, such as appraisal, title search, title insurance, credit check or recording fees.
- Interest. The interest rate on a reverse mortgage can be fixed if you take out a lump sum or variable. Variable interest rates are based on a financial index with one to three percentage points added for the lender, according to Investopedia. You only accrue interest on the amount loaned to you, not on any unused funds. However, given that you don’t have to pay back the loan as long as you stay at home and keep up with taxes and other expenses, the interest can add up significantly over time.
The costs are usually rolled into the mortgage, meaning borrowers don’t have to pay them out of pocket, although it does reduce the amount of their available loan. And costs can certainly add up. According to LendingTree, “reverse mortgages are more expensive than other types of home loans.”
Should you get a reverse mortgage?
To find out if a reverse mortgage is right for you, “start thinking about what you plan to do with the proceeds.” Kiplinger says. If you want to stay in your home as you get older, rather than moving into an assisted living facility, for example, a reverse mortgage may make sense. You can also consider a reverse mortgage to help cover expenses during a market downturn or if you need extra income in retirement.
If you have descendants you’d like to inherit your property, however, you may want to think twice, LendingTree explains. The same is true if you have family members who live with you and need to stay in the home after the reverse mortgage expires. A reverse mortgage may also not be the right choice if you are planning to move soon or if your health is uncertain.
There are other potential downsides as well. For example: You can be foreclosed upon if you fail to comply with taxes, insurance or maintenance; you can use all the equity in your house, making it unavailable later. You may need to sell your home to get out of debt. and your principal will continue to grow over time as fees and interest are added to the loan.
You’ll want to weigh the pros and cons before proceeding. While a reverse mortgage can help you stay in your home longer, bolster your retirement funds, and pay off debt, it’s also important to consider the whole financial picture.