What is a Reverse Mortgage?
What is a Reverse Mortgage? – As we age, our needs increase but unfortunately our income does not. Growing expenses can include home improvements, automotive repair and maintenance, chronic illnesses requiring ongoing treatment and prescription drugs, and a myriad of other unforeseen costs associated with increasing age and declining mobility. Unfortunately, seniors who cannot afford these growing expenses often are forced to make sacrifices in their life that negatively affect their quality of life.
While planing for or entering retirement, a reverse mortgage for seniors is a powerful financial tool that can greatly improve quality of life. Seniors should understand exactly what is a reverse mortgage. For many it can make the difference sacrificing quality of life or enjoying the “golden years.” As seniors age, their incomes do not generally increase while their needs do. Their homes need repairs and, in some cases, accessibility improvements. Chronic illnesses require ongoing treatments. Prescription drugs can be expensive. Cars wear out and either need repairs or replacement. Seniors with declining mobility may need more assistance with daily tasks.
Seniors who cannot afford these growing expenses may have to sacrifice their quality of life, independence and even their health. They’re usually reluctant to turn to their family for help and home equity loans can be expensive and must be repaid — impacting their already tight cash flow situation. Studies by AARP have shown that seniors will often sacrifice considerable quality of life in order to remain in their homes for as long as possible. Seniors of all races have the highest rates of homeownership. Studies show that seniors have the highest median home equity compared to other homeowners. That’s why reverse mortgages frequently are great options for seniors who are looking for extra income. The conversion of their home equity into cash significantly add to the fixed incomes of many senior homeowners.
So, What Is a Reverse Mortgage?
Also known as a conversion mortgage, a reverse mortgage uses the home as collateral to get cash. In many ways a reverse mortgage is similar to a conventional mortgage, but the key difference is that the homeowner doesn’t need an income to qualify and there are no monthly loan payments.
With a hecm reverse mortgage, the loan and the interest on the loan are paid off when the property is sold, during the homeowner’s lifetime or after his or her death. The proceeds from the sale of the property satisfies the loan commitment, even if the sale price is less than the combination of the loan and interest. Reverse mortgage lenders by law must accept the sale price, whatever it is, and cannot attempt to go after the homeowner’s other assets.
How Does a Reverse Mortgage Work – The Key Points
Not quite sure how a reverse mortgage works? Consider this:
1. You must be at least 62 and if there are two people on title, the younger of the two must be at least 62. Generally speaking, the older you are and the more valuable your home is will yield you the most funds. Your existing mortgage balance and the prevailing interest rates will also have an impact on the amount of funds available.
2. Take the time to learn about these mortgages. Typically there is no repayment as long as you live in your home. When the last living borrower dies, sells the home or moves — the loan must be repaid.
3. The lender will provide you with a loan in an amount ranging from 20-60 percent of your home’s equity. In return, the lender will receive a portion of your home’s value when you die or sell the home.
4. Borrower’s are responsible for property taxes, insurance, home repairs and homeowner dues if applicable. You could be in default if you fail to meet those responsibilities.
5. You can receive your funds in three ways: lump sum, regular or quarterly installments, or as a line of credit you can access as needed.
6. If you own your home outright or nearly so, a reverse mortgage can be a big financial help at a time in your life when you could really use the extra funds. If you still have a substantial mortgage obligation, it will need to be paid off and it will impact how much of a reverse mortgage you can obtain.
7. Avoid signing any service agreements with individuals who promise to help you locate a reverse mortgage lender or apply for a loan. Free or low cost help is available by calling HUD’S toll-free Housing Counseling and Referral Line at 800.569.4287.
8. Know your neighborhood values. Even though a reverse mortgage whittles away at your equity (that’s why you’re not making payments) you could benefit from rising home values where you live. In the case of a declining market — remember that you will never owe more than what your home is worth. A nice safeguard.
9. Whether or not you have a great experience securing a reverse mortgage or less-than-great … the lender you chose can make all the difference.
Advantages and Disadvantages of a Reverse Mortgage
It is critical that you understand the advantages and disadvantages of a reverse mortgage in order to make the best decision for your situation.
I spoke with a couple just the other day who are facing a difficult dilemma. Apparently they had secured a reverse mortgage from another individual just a couple of years ago and now they are realizing that it may not have been the best strategy for them. It seems that they now realize that their home is no longer suitable for their needs. It’s a multi-story and, due to health problems, they really need everything on one level — a ranch configuration would be much better.
They took out the maximum loan at the time, and if they didn’t need to move out of their current home, there would not have been a problem. The challenge is the depressed real estate market in the Metro-Denver area. After some research, they discovered that their home value had declined significantly. So much so that they are in a zero equity position. To make matters worse, their cash flow situation is not very good. Because of their cash flow issues, the fact that their reverse mortgage is rather new, and their inability to sell their home — they are in a very difficult situation.
There may be light at the end of that tunnel, nevertheless. Since a reverse mortgage is a non-recourse loan, they will never owe more than the actual value of their home. Should they decide to sell their home and if it sells for less than their current loan balance, the mortgage insurance (required on all HUD reverse mortgages) will have to make up the difference — protecting the home owners from further financial damage.
Reverse Mortgage Calculator
Our Online Reverse Mortgage Calculation is a system designed by the Federal Housing Administration that determines a Senior Homeowner’s eligibility for a Reverse Mortgage Transaction. The proceeds available are based on the youngest borrower and property value.
Find out how much you qualify by entering your information now into the HECM loan calculator.
Reverse Mortgage Pros and Cons
So, are reverse mortgages good options for seniors? Let’s examine the reverse mortgage pros and cons:
* Homeowners can provide necessary cash from the equity you have in your home, without incurring monthly expenses.
* Homeowners cannot be forced by lenders to sell their property to pay back the loan.
* The homeowner is guaranteed to stay on the property for as long as he or she lives, even if the loan and interest becomes more than the value of the property.
Disadvantages of a Reverse Mortgage
Reverse mortgage fees can be high, although the fees are often rolled into the loan and not paid upfront. Rates vary so it’s important that you secure a knowledgeable reverse mortgage consultant. The FHA reverse mortgage program is a lower cost option from the U.S. Department of Housing & Urban Development (HUD).
Getting a reverse mortgage is essentially the same as spending the money you’d expect to leave to your heirs. Discuss your reverse mortgage plans with trusted advisors and family members before making your decision. Getting sound advice is essential because your home is often a person’s most valuable asset.
Sometimes seniors become targets for scams. Typically, they are trusting of people who are perceived as experts. They may not fully understand the details of the reverse mortgage agreement or may not be thinking clearly (due to the onset of dementia or early stage Alzheimer’s). It’s very important to get a trusted consultant to explain the details of the reverse mortgage in full.
A reverse mortgage makes sense if your current home meets your needs now and for at least the next 3 – 5 years. Like any other financial tool, you should always ensure that you fully understand the financial ramifications of a reverse mortgage. The fact that these loans are growing is testimony that reverse mortgage benefits more and more people looking for ways to supplement their retirement income. A good reverse mortgage lender will clearly explain the advantages and disadvantages of a reverse mortgage and how it affects your situation, ensuring that you have all the reverse mortgage pros and cons to make an informed decision.
What To Do With Your Reverse Home Mortgage Funds
Your reverse home mortgage lender will help you determine how much you’re eligible to receive, but it’s up to you how you use it. It’s your money to spend or save as you see fit. You can even choose whether to receive it as cash, a line of credit, a monthly income, or a combination of these options. Some options that you can use your reverse home mortgage proceeds are:
Home repairs: Install safety grab bars in shower, spring cleaning, clean or replace carpeting, interior and exterior painting, general repairs, new roof, new hot water heater, new furnace, update kitchen appliances, remodel bathrooms, finish basement, landscaping improvements, repair or replace deck, or just buy a new home closer to your grandchildren. Not everyone realizes that a reverse mortgage can be used for a new home purchase!