In the face of growing prices, many elderly struggle to find support. Some people use a reverse mortgage to boost their income while continuing to live in their houses and critical access funds.
What homeowners thinking about getting one should know about reverse mortgages is explained here.
What Is A Reverse Mortgage?
With a reverse mortgage, homeowners 62 and older who have traditionally paid off their mortgage can borrow a portion of the equity in their property as tax-free income. The lender pays the homeowner instead of the other way, like a standard mortgage with a reverse mortgage.
How Does A Reverse Mortgage Work?
Like a conventional mortgage, a reverse mortgage loan enables homeowners to borrow money while using their house as security for the loan. The title to your property is still in your name when you take out a reverse mortgage loan, just like with a conventional mortgage.
With a reverse mortgage loan, borrowers do not make monthly mortgage payments, unlike a conventional mortgage. When the borrower vacates the property, the loan is paid back. Each month, fees and interest are added to the loan sum, which causes it to increase.
To qualify for a reverse mortgage loan, a homeowner must maintain good credit, pay property taxes and homeowners insurance, and utilize the home as their primary residence.
With a reverse mortgage loan, the homeowner’s debt to the lender increases over time, not decreases. This is so that the monthly loan balance can include interest and fees. Your home equity declines as your loan balance rises.
Reverse Mortgage Requirements
Older homeowners who lack alternative retirement savings options might access the equity they’ve built up in their homes through reverse mortgages. As a result, to be eligible for a reverse mortgage, you must be at least 62 years old. Additionally, your spouse must also be 62 years old if you want to add them as a co-borrower, which you should do if you can.
Additionally, you must have a sizeable amount of equity in your house—typically at least 50%. The house, condo, townhouse, or mobile home you are taking out a reverse mortgage on must be one that you now reside in and was built on or after June 15, 1976.
Income and credit checks
There are no income or credit score limitations for reverse mortgages. Reverse mortgages differ from home equity loans and home equity lines of credit (HELOC) in this way. Homeowners have access to home equity through HELOCs. In contrast, home equity loans and HELOCs to reverse mortgages require applicants to qualify, make payments, and maintain an acceptable credit score. On the other hand, they might be less expensive and have fewer costs than a reverse mortgage.
All prospective reverse mortgage borrowers are required by the Department of Housing and Urban Development (HUD) to complete a counseling session approved by HUD. Given your particular financial and personal circumstances, this counseling session, which typically costs around $125, should last at least 90 minutes. It will go over the advantages and disadvantages of getting a reverse mortgage.
The process of putting up a reverse mortgage is not free. The borrower must pay the origination fee and the upfront mortgage insurance premium. According to the Consumer Financial Protection Bureau, you might not need any money to obtain a reverse mortgage, as the loan itself frequently covers these expenses. However, it’s crucial to understand that reverse mortgages include substantial upfront charges, regardless of whether you pay them with your own money or the equity in your home.
Types Of Reverse Mortgages
Single-Purpose Reverse Mortgages
State, local, and charitable organizations provide a single-purpose reverse mortgage. It is the most affordable reverse mortgage loan option because the government and other NGOs support it. For this reason, homeowners should anticipate paying less interest and fees for a single-purpose reverse mortgage than a home equity conversion mortgage (HECM) or a proprietary reverse mortgage.
Home Equity Conversion Mortgages (HECMs)
HUD backs home equity conversion mortgages (HECMs) since they are federally guaranteed. This loan has substantial upfront expenses and is more expensive than a conventional house loan. Because there are no income restrictions or medical conditions, and the loan can be utilized for any purpose, it is the most popular type of reverse mortgage.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are supported by private lenders rather than the federal government. They help homeowners who need more money and whose properties are valued greater. If the value of your home exceeds the $970,800 loan cap for federally-backed HECMs in 2022, you might be eligible for a proprietary reverse mortgage.
Reverse Mortgage Pros And Cons
Reverse Mortgage Pros
A reverse mortgage could help you stay afloat if you’re having trouble meeting your financial responsibilities. Here are some advantages of choosing a reverse mortgage.
1. Helps Secure Your Retirement
Reverse mortgages are a great option for retirees with significant housing wealth who need more cash savings or investments. With the help of a reverse mortgage, you can convert an otherwise unusable asset into cash that you can use for retirement costs.
2. You Can Stay in Your Home
You can keep the property and yet receive cash out instead of having to sell it to liquidate your asset. This implies that you won’t have to worry about downsizing or being priced out of your community if you have to move.
3. You’ll Pay Off Your Existing Home Loan
A reverse mortgage can be obtained even if your house isn’t completely paid off. In fact, you can pay off an existing mortgage with the money from a reverse mortgage. This makes money available to use for other expenses.
4. You Won’t Have Tax Liability
The money you receive from a reverse mortgage is not considered income by the IRS but rather a loan advance. As opposed to other retirement income like distributions from a 401(k) or IRA, the monies aren’t taxed.
5. You’re Protected If the Balance Exceeds Your Home’s Value
Your home’s worth might, in some circumstances, turn out to be lower than the entire amount payable on the reverse mortgage. For instance, this may occur if housing prices decline. If this happens, the remaining balance is not a concern for your heirs.
Reverse Mortgage Cons
Despite what could appear to be a lot of advantages, there are also significant concerns linked with a reverse mortgage. Here are they;
1. You Could Lose Your Home to Foreclosure
You must be able to pay your property taxes, homeowners insurance, HOA dues, and other expenses related to owning your house to be eligible for a reverse mortgage. Additionally, you must spend most of the year residing inside the house as your primary residence.
You risk defaulting on the reverse mortgage and losing your house to foreclosure if, at any time throughout the loan term, you fall behind on these costs or live away from the property for most of the year.
2. Your Heirs Could Inherit Less
A crucial step in creating generational wealth is home ownership. But a reverse mortgage typically necessitates the sale of the house to pay off the debt. Your whole loan total, or 95% of the home’s appraised worth, whichever is less, must be repaid by your heirs after you pass away. Typically, this entails selling the house or giving the lender the property to repay the loan.
Not to mention, a reverse mortgage depletes the equity in your house. No equity might be left for your heirs by the time it needs to be paid off.
3. It’s Not Free
A reverse mortgage may not require you to make payments, but there are still a lot of costs involved. In addition to paying an upfront insurance cost, you must maintain your HOA, insurance, and tax obligations. This is typically 2% of the appraised value of your house. At closing, you will additionally pay origination costs. These expenses might be added to your loan balance, which reduces the amount you get.
4. It Could Impact Your Other Retirement Benefits
While a reverse mortgage may not be taxable, it may still affect your eligibility for other need-based government programs like Medicaid or Supplemental Security Income (SSI). Discussing this with a benefits consultant to ensure your eligibility won’t be affected would be a good idea.
5. Reverse Mortgages Are Complicated
Reverse mortgages are subject to numerous restrictions and limitations. These loans have a lot of risks, which might not be worth the extra money. Any offer for a reverse mortgage should be avoided unless the details are thoroughly understood.
Costs of Reverse Mortgage
The price of a reverse mortgage loan will vary depending on the loan type and lender you select. A reverse mortgage loan typically costs more than comparable house loans.
The costs associated with reverse mortgages are as follows:
Borrowers taking out a HECM reverse mortgage loan must obtain counseling from a reverse mortgage housing counseling service that HUD has approved before receiving the loan.
The price of housing counseling will vary based on the organization and your unique circumstances. The cost of this counseling session, typically around $125 but more, covers the advantages and disadvantages of a reverse mortgage as it relates to your particular financial circumstances. Counseling ensures you know what will happen if you pass away or must leave home because it may have consequences for either your heirs or spouses who may live with you but are not necessarily on loan.
Other Upfront Costs
Like a traditional mortgage, borrowers typically have to pay one-time upfront costs at the beginning of the reverse mortgage loan. According to Consumer Financial Protection Bureau, these costs include:
- Origination fees (paid to the lender and not to exceed $6,000)
- Appraisal, title searches, surveys, inspections, recording fees, mortgage taxes, credit checks, and other fees are examples of real estate closing costs that are paid to third parties.
- An initial and yearly mortgage insurance premium is levied by your lender and given to the Federal Housing Administration. Your planned loan advances are guaranteed by mortgage insurance. You do not need to pay for homeowners insurance with this insurance.
You have two options for covering these expenses: cash or a loan. You won’t need to bring any cash to the closing if you use the loan funds to cover upfront expenses, but you’ll have less money overall available from the reverse mortgage loan proceeds.
Each month, ongoing expenses are added to the loan balance. This implies that in addition to the interest and fees already applied to your loan sum from the prior month, you are also charged interest and fees each month. Ongoing expenses could include:
- Servicing fees are paid to your lender to cover expenses like mailing your account statements, allocating your loan proceeds, and monitoring your compliance with the loan’s conditions.
- Annual mortgage insurance premium, which is equal to 0.5% of the outstanding principal amount of the mortgage
- Property charges such as homeowners insurance, property taxes, and flood insurance.
Your recurring fees will increase as your loan balance and term length increase. The greatest strategy to minimize your continuing expenses is only borrowing what you need.
Reverse Mortgage Lenders
Consider your choices if a reverse mortgage is a smart idea. According to information from the Home Mortgage Disclosure Act, these are the top 10 reverse mortgage lenders as of 2022:
- American Advisors Group (AAG)
- Finance of America Reverse
- Reverse Mortgage Funding
- PHH Mortgage
- Mutual of Omaha
- Longbridge Financial
- Cornerstone First Mortgage
- Open Mortgage
- Nationwide Equities Corp.
Reverse mortgages offer elderly homeowners a means to boost their retirement income, pay for home improvements, or cover additional obligations like medical bills. Based on the equity your house has, a HELOC or refinance should be among the options you explore.
Furthermore, although reverse mortgages might give seniors with poor cash flow some breathing room, fees can reduce the amount of money they can use. Most fees, except for the counseling session, can and will be added to the overall loan amount. To determine whether a reverse mortgage is appropriate, carefully examine the itemized fees.