When Should You Consider a Reverse Mortgage?

The following is a guest post. Enjoy! 

For millions of American seniors, the very thought of retirement is enough to bring on a sense of panic.  The reason is simple, multiple financial crises and the ever-increasing cost of living have rendered seniors financially vulnerable.

But what can they do? Try as you might, you can’t work forever and there is no guarantee that Social Security will survive the onslaught of millions of Baby Boomers entering retiring.  Given this uncertainty, an increasingly popular retirement planning option is the reverse mortgage.

However, many people are still unfamiliar with reverse mortgages and when to get them.  With that in mind, here are some answers to many of the questions you’ll need to ask when you are considering a reverse mortgage.

 

1) How do I know if I am eligible?

The eligibility requirements for most reverse mortgages is quite simple.  First, you must be at least 62 years old and then the property must be your primary residence.  While the amount you can borrow will depend on several factors such as your age, the value of your home, and the balance of your current mortgage; in most cases, you can borrow up to $625,500.

Other things that will come up when a lender looks at your eligibility is whether you can continue to pay your homeowner’s insurance property, taxes, and utilities.  In addition, you will need to continue to maintain the property or run the risk of defaulting on the loan.

The best way to check out your eligibility to contact a lender and if you live in California search for lenders here.

 

2) How Does It Work?

While reverse mortgages are loans, they do not function in the same way as traditional mortgages and home equity loans.  The key difference is that you won’t have to make regular monthly payments.  Instead, the principal and interest due will accrue over time and then the loan will become payable once you no longer live in the home.

In addition, you have two options to consider when taking out a reverse mortgage.  The first is a lump sum payment – this basically means you will get the entire loan amount at closing.  The second is a line of credit and this option has its advantages as the interest accrual is only on the line that you have used.  Another benefit of a line is that the amount available can grow over time as the value of your home appreciates.

You will need to repay the loan when you no longer living in the residence.  As such, one good option is to take out a life insurance policy to cover all or most of the amount due when it comes time to repay the loan.  This will help to protect your heirs from having to repay the bank out of their own pockets.

 

3) What Does It Cost?

Obviously, the total cost of a reverse mortgage will depend on how much you borrow, the interest rate, and how long the loan accrues.  Another aspect of reverse mortgages is determining the closing costs.  This will include fees from the lender such as origination fees but will also include mortgage insurance, title insurance, state and local fees, and the cost of an appraisal.

In addition, most reverse mortgages are variable rate loans.  As such, you can expect the costs to go up as interest rates increase.

The point here is that you want to look at all the costs when determining the cost of a reverse mortgage as this will help you to decide if this loan is the right fit for your retirement needs.

 

4) Are There Other Options?

In some cases, a reverse mortgage is not the best option for you.  One option might be to sell your home and then downsize by moving into a smaller home.  The decision to take out a reverse mortgage is not something to be taken lightly and as you can see there are many pros and cons to consider.

When considering a reverse mortgage your best bet is to talk over the option with your family and your adviser.  In the end, the decision is yours but you want to make sure you think through all the options before deciding.

Reverse Mortgage – What Is It And Can It Help You?

The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.

You’ve undoubtedly seen the ads on TV for reverse mortgages – former Tennessee State Sen. Fred Thompson is doing one of the more common commercials right now. It seems like a made to order situation for a senior citizen who is struggling with finances but doesn’t want to sell their home.

Reverse mortgages have their advocates – and no small number of critics too. But all of the hype aside, what is a reverse mortgage, and how can it help you or a loved one?

 

How does a reverse mortgage work?

Reverse mortgages are available from several different sources, but by far the most common is the US Department of Housing and Urban Development’s (HUD) mortgage arm, the Federal Housing Administration (FHA). They offer federally insured reverse mortgages in the form of Home Equity Conversion Mortgages (HECM).

Reverse mortgages work in opposite fashion from traditional mortgages. Instead of you paying the lender for the loan on a monthly basis, the lender makes monthly payments to you, as the borrower. As it does, the amount of your mortgage increases. And unlike a traditional mortgage, you do not have to repay the loan until you die, sell the house or move from it as your primary residence.

You have to be 62 years old or older, and use the money as an extra source of income, to make home improvements, or to pay for medical expenses. In order to do this, you have to either own the home free and clear, or have a very small remaining mortgage balance left.

The proceeds of the loan are tax-free, and there are no income restrictions for qualification purposes. The amount of the mortgage you can borrow is determined by the value of your home, your age (the older you are the more you can borrow), and of course the rate of interest. HUD has a reverse mortgage calculator that will help you to determine the amount you can borrow under the program.

According to the US Department of Housing and Urban Development, you can select from five payment plans:

  1. Tenure – equal monthly payments as long as at least one borrower lives and continues to occupy the property as a principal residence.
  2. Term – equal monthly payments for a fixed period of months selected.
  3. Line of Credit – unscheduled payments or in installments, at times and in an amount of your choosing until the line of credit is exhausted.
  4. Modified Tenure – combination of line of credit and scheduled monthly payments for as long as you remain in the home.
  5. Modified Term – combination of line of credit plus monthly payments for a fixed period of months selected by the borrower.

Should you or a loved one take a reverse mortgage? Let’s take a look at both sides of that question…

The case for a reverse mortgage

Given the right combination of circumstances, a reverse mortgage can be worth considering. Some of the many advantages include:

  • It gives you access to the equity in your home to pay for living expenses.
  • It can allow you to stay in your home if you don’t have enough money otherwise.
  • The proceeds can be used to repair the home or cover medical expenses
  • You are not required to verify income.
  • No monthly payments are required – the program pays you based on the payment plan you select (see the list of five payment plans above).
  • In the HECM program, a borrower can live in a nursing home or other medical facility for up to 12 consecutive months before the loan must be repaid.

A reverse mortgage may work best if the purpose is to pay for home improvements, or to satisfy medical expenses, and in the smallest loan amount possible. This will avoid the complete stripping out of equity that a large loan amount will result in, or the ultimate destruction of equity that could result from the need for a steady income for many years.

The case against a reverse mortgage

Unfortunately, there are at least as many reasons to avoid reverse mortgages. Some of the more significant negatives include:

  • You will have to pay mortgage insurance on the loan.
  • The loan will ultimately cause you to lose equity in your home.
  • If you change residences (other than the above mentioned move to a nursing home for up to 12 months) you will have to repay the loan.
  • The amount you can borrow against the house will be less than what you will get on an outright sale of the property.
  • You will have to pay origination fees in order to obtain the loan.
  • If the equity is drained and you still can’t afford the house, you will have to sell, but with less equity coming out of the sale
  • The loan will leave less money in your estate for your heirs.
  • There are lenders who prey on the elderly and are less than reputable; the Federal Trade Commission offers some warnings and guidelines on this issue.

As a general consideration, if a senior citizen is in a position of not being able to afford to keep his or her home, it may be best to sell the property and avoid the reverse mortgage altogether. The sale of the home will result in a greater amount of proceeds, as well as avoiding the restrictions that come with a reverse mortgage.

How about you all? Have you taken a reverse mortgage, or do you know of anyone who has? Do you believe that it is an option worth taking – or disaster in the making?

Share your experiences by commenting below!  

***Photo courtesy of http://www.flickr.com/photos/cooljerk/259381229/sizes/n/in/photolist-oVp1a-3B8NUt-5kwves-5v