Reverse Mortgages
If you’re aged 62 or older and concerned about financing your retirement, you might consider a reverse mortgage as a potential solution. Nevertheless, this financial arrangement is intricate and carries certain drawbacks.
Understanding the mechanics of this loan, its potential benefits, and its alignment with your financial circumstances and retirement objectives is crucial. Let’s delve into the intricacies of a reverse mortgage to empower you to make an informed decision.
What is a Reverse Mortgage?
A reverse mortgage is a financial product tailored for homeowners aged 62 or older, enabling them to tap into a portion of their home equity. Unlike conventional mortgages, a reverse mortgage functions inversely: rather than making payments to your lender, your lender disburses payments to you. Initially, the loan settles any outstanding mortgage balance, if applicable, leaving the remaining funds at your disposal for various purposes. While enjoying these benefits, you remain accountable for property taxes, homeowners insurance, and property maintenance. This loan type caters to older homeowners seeking to alleviate monthly mortgage obligations or bolster their income during retirement.
Reverse Mortgage Eligibilty
- You must be at least 62 years of age.
- You can only get a reverse mortgage on your primary residence, not a second residence or vacation home.
- To take out a home equity conversion mortgage (HECM), the U.S. Department of Housing and Urban Development (HUD) requires that you attend a reverse mortgage counseling session. You’ll also be required to undergo a financial assessment to ensure you can meet the financial obligations of the loan.
- You can’t owe federal debt, such as student loans or income tax.
- The real estate must meet required property standards.
How Does a Reverse Mortgage Work?
While a reverse mortgage may appear to offer easy access to funds, it comes with its intricacies. Essentially, it allows you to borrow against your home’s equity, which is the disparity between your outstanding mortgage balance and your home’s current value.
To ascertain the amount you can borrow through a reverse mortgage, your lender will conduct a home appraisal. For instance, if your home is valued at $350,000 and you owe $100,000 on your mortgage, you possess $250,000 in equity. However, most lenders won’t permit you to borrow the entire $250,000; instead, they’ll offer a percentage, ensuring some equity remains untouched.
Here are some additional key points to consider when navigating life with a reverse mortgage:
Your Pre-existing Mortgage Takes Priority:
Proceeds from the loan are first directed towards settling your existing mortgage, thereby eliminating the need for monthly mortgage payments. Depending on your preference, you can receive funds from your lender as a lump sum, monthly installments, or a line of credit, or any combination thereof. These funds are non-taxable.
However, it’s essential to note that a reverse mortgage can affect certain means-tested assistance programs, warranting consultation with a financial advisor before proceeding.
While you receive payments, your lender will accrue interest on your outstanding loan balance. Consequently, the total amount owed will increment over the course of your reverse mortgage’s lifespan.
Certain Expenses Persist:
A reverse mortgage does not absolve you of specific financial obligations. You remain responsible for annual property taxes, homeowners insurance premiums, as well as origination fees and closing costs associated with the reverse mortgage. Furthermore, you must uphold home maintenance standards and cover any homeowners association dues.
Repayment is Deferred:
Repayment of the loan is deferred until you sell your home, vacate the premises, or pass away. Upon selling the property, you’re obliged to repay the outstanding balance using proceeds from the sale. Any surplus funds remain at your disposal.
Options for Heirs:
Upon your demise, the reverse mortgage becomes due. Your heirs are presented with several choices. They may purchase the home for the loan balance or 95% of the appraised value, whichever is lower. Alternatively, they can sell the property and retain any remaining proceeds after settling the loan. Alternatively, they may relinquish the property to the lender to satisfy the debt.
Reverse Mortgage Fees
A homeowner seeking a reverse mortgage will encounter various fees from the lender, apart from those previously discussed. These fees can be settled either with cash or by utilizing funds from the loan. Here are some fees to anticipate:
Housing Counselor Fee:
As previously mentioned, obtaining an HECM loan necessitates consulting with a specialist from a HUD-approved counseling agency. The expenses associated with this service may vary.
Mortgage Insurance Premium:
In addition to your homeowners insurance, a mortgage insurance premium is required to ensure the receipt of anticipated loan advances.
Servicing Fees:
These fees enable your lender to manage the administrative tasks associated with your account.
Different Types of Reverse Mortgages
Home Equity Conversion Mortgage (HECM)
The predominant form of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA). In 2024, the maximum borrowing limit for these loans is $1,149,825. If your borrowing needs exceed this amount, you’ll have to opt for a jumbo reverse mortgage. Eligible property types for HECM loans include single-family homes, HUD-approved condominiums, manufactured homes meeting FHA standards, and select other property types.
Single-Purpose Reverse Mortgage
A single-purpose reverse mortgage is typically more economical than an HECM but has its limitations. As the name implies, funds from this type of reverse mortgage can only be used for a single designated purpose. While your lender may approve the loan, they may restrict the use of funds solely for purposes such as home repairs, insurance premiums, or property tax payments. Typically offered by charities, nonprofits, and local governments, these loans are tailored for homeowners facing financial difficulties with a lower-to-moderate income. Availability may vary based on location.
Jumbo Reverse Mortgage
For borrowing amounts exceeding $1,149,825 in 2024, you’ll need to consider a jumbo reverse mortgage, also referred to as a proprietary reverse mortgage. Due to the higher risk associated with larger loans, lenders may impose higher fees and interest rates. Unlike HECMs, jumbo reverse mortgages lack FHA insurance, resulting in fewer protections. Additionally, they do not mandate an HUD-approved counseling session or financial assessment.
Pros and Cons of Reverse Mortgages
Advantages of a Reverse Mortgage
You Get To Stay In Your Home
If you find it challenging to meet your mortgage or other financial obligations, a reverse mortgage can alleviate your monthly mortgage payment burden and offer an additional income source. This could potentially offer the necessary financial relief to enable you to continue residing in your home. However, it’s crucial to note that despite these benefits, you remain responsible for ongoing financial commitments associated with the loan, such as homeowners insurance and property taxes.
Reverse Mortgages Are Immune To Devaluation
If you take a HECM, you will never have to worry about declining home values because you will never owe more than your home is actually worth.
Your Spouse May Be Able To Remain In The Home
Even if you pass away your non-paying spouse might be able to remain in the home instead of selling. This will certainly bring you a peace of mind later in life.
Disadvantages Of A Reverse Mortgage
Your Equity Decreases
Simply put, because you are borrowing against the equity in your home, you will make less profit if you decide to sell later or your heirs will inherit less.
Your Loan Balance May Increase
The balance on your reverse mortgage will grow over time, especially if you don’t make payments to cover the interest charged by your lender. This leave less room for profit for yourself or your heirs.
You May Outlive Your Loan’s Benefits
You could potentially spend all of the money before you pass away. Consider taking tenure payments, which will provide equal monthly payments for as long as you remain in the home as your primary residence. If you choose a different payment, you’ll need to budget your money and spending accordingly.
Your Children Will Have To Pay It Off To Keep The Home
If you plan on leaving the home with family who wish to keep the home, they will need to pay off the reverse mortgage. If they can’t do this, they’ll ahve to sell the home or sign the deed over to the lender.
If your reverse mortgage is a HECM, which is insured by the federal government, it’s a non-recourse loan. That means you’ll never owe more than the value of home. If you sell your home for an amount lower than you owe, you don’t have to pay back the difference.
Reverse Mortgage FAQs
Can I owe more than the value of my home with a reverse mortgage?
With an HECM, the most common type of reverse mortgage, you won’t exceed your home’s value when repaying the loan. If you end up owing more on your mortgage than your home is worth (known as being underwater), the mortgage insurance covers the shortfall if you sell the home for its appraised value.
Can I undo a reverse mortgage?
Exiting a reverse mortgage can be time-consuming and costly. Selling your home is one option, using the proceeds to settle the reverse mortgage. Alternatively, if you wish to remain in the home, refinancing the reverse mortgage into a conventional mortgage is possible, although it typically involves closing costs ranging from 2% to 6% of the loan amount.
How do I sell my home with a reverse mortgage?
When selling your home, the sale proceeds go towards paying off the reverse mortgage. If you sell the home for its appraised value but owe more on your mortgage, mortgage insurance steps in to cover the shortfall under an HECM. Conversely, if the sale price exceeds what you owe, you keep the remaining funds.
What is the maximum amount I can receive from a reverse mortgage?
The amount you can borrow through a reverse mortgage depends on factors such as the youngest borrower’s age, prevailing interest rates, and the equity in your home.
Can I refinance a reverse mortgage?
Refinancing a reverse mortgage is an option to secure a lower interest rate or transition to a different mortgage type. However, this process involves closing costs and necessitates sufficient home equity to qualify for the refinance.