Are you considering a reverse mortgage? right for you? If you listen to the ads you see on daytime TV, you might think a reverse mortgage loan is a key to unlocking your retirement dreams. Indeed, a reverse mortgage can be a source of income during your golden years. But before committing, it’s essential to carefully evaluate the pros and cons of reverse mortgages. This comprehensive guide will provide you with an overview of the reverse mortgage process and help you determine whether it’s suitable for your needs.
This guide will introduce you to the reverse mortgage process and help you decide whether it is right for you.
What Is a Reverse Mortgage?
A reverse mortgage is a financial option available to individuals age 62 or older. It allows you to convert the equity in your property into cash, a line of credit, or a monthly payment from a reverse mortgage lender. **Proprietary products are available to borrowers as young as 55 years old in some states** Unlike a traditional mortgage, where you make monthly payments to your lender, in a reverse mortgage, the lender pays you. This feature makes it an attractive source of supplemental income during retirement.
Lenders cannot recall the loan unless the homeowner dies, sells the home, or moves. Under normal circumstances, the loan will be transferred to your heirs once you pass on, and it can be easily repaid from the sale of the house.
Reverse Mortgage Eligibility
To qualify for a reverse mortgage, you must meet certain requirements to qualify, including:
- Age: You must be at least 62 years of age (55yrs+ on some proprietary products in certain states).
- Homeownership: You must own your home outright or have decent equity available.
- Principal Residence: The home must be your principal place of residence.
- Property Condition: The home must be in good shape and meet FHA minimum property standards.
- Financial Status: You must be free from any federal debt defaults and not currently in bankruptcy proceedings (income taxes, federal student loans).
- Counseling: Before qualifying, you may need to meet with a HUD-approved counselor to discuss the pros and cons of reverse mortgages, your financial preparedness, and alternative options.
Pros of Reverse Mortgages
Reverse mortgages provide several advantages worth considering:
- Supplemental Income: Many Americans reach their retirement years only to discover that their carefully planned retirement strategy is no match for rising inflation. Reverse mortgages can fund retirement years and supplement other income sources, such as Social Security.
- Mortgage Payoff: If your loan balance is low, a reverse mortgage can help eliminate it entirely, providing financial freedom. Furthermore, by tapping into your equity, you can secure a steady source of financing during your retirement years.
- Home Retention: A reverse mortgage allows you to keep your home and enjoy an influx of cash rather than being forced to downsize or move away from friends and family. The loan only comes due when you or your loved ones sell your home, which means you can enjoy some much-needed stability and peace of mind throughout your retirement years.
- Price Protection: Lenders are insured, protecting you and your next of kin from owing more than the home’s value.
Cons of Reverse Mortgages
Despite several major advantages, reverse mortgages have disadvantages to consider:
- Reduced Inheritance: Reverse mortgages may reduce the inheritance your heirs receive, as the home will likely need to be sold to repay the debt. This may be mitigated with insurance products and proper financial planning. Speak to a licensed loan officer for details.
- Foreclosure Risk: Falling behind on expenses like property tax and insurance could result in default and foreclosure.
- Additional Fees: Reverse mortgages involve closing costs and mortgage insurance premiums, which can lower the available funds.
- Impact on Your Retirement Benefits: What happens if you need assistance from government programs such as Medicaid or Supplemental Security Income (SSI)? The government may look at your income and disqualify you based on the money you receive through your mortgage.
- Complex Process: The reverse mortgage process can be intricate, requiring thorough understanding and careful consideration. Working with a knowledgeable and reputable lender is crucial.
Types of Reverse Mortgages
Now that you have evaluated the pros and cons of reverse mortgages, you need to consider that not all reverse mortgages are the same. Different types of reverse mortgages offer unique advantages, though they can also bring different fee structures, interest rates and more. Here are the main types:
1. Home Equity Conversion Mortgage (HECM):
One of the most common types of reverse mortgages is the Home Equity Conversion Mortgage (HECM). The main advantage of HECMs is that they’re federally insured and backed by the U.S. Department of Housing and Urban Development (HUD). HECMs can be quite flexible, with no income limitations or medical requirements. You should also be prepared to pay mortgage insurance premiums (MIPs). These fees consist of a 2% upfront fee and a 0.5% monthly fee over the life of your loan. You can finance both fees through your loan, though doing so will reduce the amount you receive.
2. Proprietary Reverse Mortgage:
Proprietary reverse mortgages are backed by private lenders. Their primary advantage is that these lenders will often appraise your home at a comparatively high value, which can give retirees a larger amount of money to draw from. Because the federal government doesn’t back proprietary reverse mortgages, recipients aren’t responsible for making upfront or monthly insurance premiums. That usually means you’ll be able to borrow more, which can add to the overall value of the program. Just make sure you compare interest rates and other terms between at least three lenders. That way, you can obtain the best rates and terms and avoid hefty origination fees or hidden costs.
3. Single-Purpose Reverse Mortgage:
A single-purpose reverse mortgage is the least expensive option and one that may be backed by local or state government agencies or nonprofits. But that also means that this reverse mortgage program is not available in all 50 states, so you’ll need to check with a reverse mortgage lender to determine whether this program is available to you. As the name suggests, single-purpose reverse mortgages are designed to finance one specific need, such as covering taxes or performing a home renovation or repair. Lenders must approve this need before issuing the reverse mortgage, which means you have much less flexibility than with the previous two options.
Payment Options and Disbursement
How do you claim the funds from a reverse mortgage? There are several different options. More specifically, you can receive your mortgage payments in one of three ways:
- Monthly payments for a set period (term option)
- Monthly payments for as long as you own the house (tenure option)
- A line of credit
You can also combine some of these options. For instance, you might pair monthly payments with a line of credit for maximum flexibility.
Considerations Before Taking Out a Reverse Mortgage
Before making a decision, ask yourself the following questions:
- Is My Home Increasing in Value? If the value of your home is rising, you can take out a reverse mortgage based on your current equity and pass on the remaining value of your home through your estate.
- Do I Plan on Remaining in My Home? Remember, a reverse mortgage is due once you sell your home. If you plan on staying in your home for a long time, a reverse mortgage can be a good way to receive income without having to worry about repayment.
- Can I Cover the Costs of My Current Home? A reverse mortgage won’t necessarily help you cover the current costs of homeownership. And if you get behind with taxes or other expenses, you risk foreclosure. That said, if you’re already reasonably secure, a reverse mortgage can help you supplement your current income.
Discuss Your Reverse Mortgage Options
Before you make any big decisions, it’s a good idea to sit down with a qualified financial advisor or discuss your financial future with your loved ones. A reverse mortgage can have a certain appeal, but the risks that can come with it shouldn’t be taken lightly.
If you’re looking for ways to tap into additional money after you retire, you might consider alternatives like:
Related: Home Equity Loan vs. HELOC: What Is the Difference?
If your home’s mortgage isn’t paid off, it might also be an appropriate time to consider refinancing options. Refinancing your home will lock in a lower interest rate, which can reduce your monthly payments during a season of life when your cash flow is limited.
Find an Advisor Near You
It’s natural to have questions about such a complex and important subject. After all, this may be unfamiliar territory to many homeowners. Contact the experienced team at CrossCountry Mortgage today to learn more about reverse mortgages. Our experts can evaluate your financial readiness and provide helpful insight into your options.