Let’s talk about reverse mortgages. There are plenty of lenders out there advertising the advantages and benefits. But most homeowners take pause. There are contingencies and stipulations to know about before you make any official decisions. And to demystify reverse mortgages here’s everything you need to know if they present the right advantages for you.
What Is the Reverse Mortgage?
Starting with basic definitions, a reverse mortgage is a method for homeowners over the age of 62 to leverage their home equity. Those homeowners who own their properties outright, or have substantial equity, have an opportunity to use a reverse mortgage to borrow against their equity. The funds they receive will not have to be repaid until the homeowner leaves the home.
These types of loans are attractive for a number of reasons. Those approaching retirement or who are in retirement facing limited financial security can use the equity in their homes to supplement their income. Reverse mortgages are also popular because there are no monthly payments to pay, and the borrowers can remain in their homes.
How You Can Use Reverse Mortgage Funds
Most seniors explore their reverse mortgage options because they’re interested in supplementing their retirement income. But there are still plenty of other valid reasons to look into the reverse mortgage, even if you’re just interested in making a few property improvements or upgrades, for example. Other acceptable uses include paying down debts, handling unexpected medical bills, or taking a vacation. Whatever you need the additional funds for, the reverse mortgage can be the ideal alternative to high-interest loans or unfavorable lines of credit.
Types of Reverse Mortgages
There are nuances to consider and other variances to reverse mortgages to know before you decide to explore your options. The three most popular reverse mortgage types include those backed by the FHA, non-FHA-backed loans and single-purpose loans offered by local or state municipal organizations. Proprietary reverse mortgages are those supplied through private lending institutions, not subject to FHA limitations. Additionally, single-purpose reverse mortgages, which are not as common, are also available for specific needs or expenses, provided by some local governments as well as non-profit organizations.
Each type will present requirements, terms, and conditions. Before choosing a reverse mortgage loan for yourself, discuss these terms with a financial professional who will ensure you understand everything before you agree. Regardless of which type you consider, these are the requirements for securing any reverse mortgage.
- You have to own the property outright or have paid a substantial percentage of the mortgage.
- The property must be your primary residence.
- You can’t have any delinquent federal debt of any kind.
- You must prove your financial solvency to maintain property taxes, insurance, and association dues.
- You will be required to participate in a discussion with a HUD-approved reverse mortgage counselor.
The HECM Reverse Mortgage
The Home Equity Conversion Mortgage, or HECM, is probably one of the most popular types of reverse mortgages. It’s backed by the federal government, and the principal limit, or the amount a homeowner can borrow, will vary. These are generally based on the interest rates, ages of the non-borrowing spouses, and the home’s value. In 2021, the HECM limit was $822,375.
When exploring your HECM reverse mortgage options, consider your principal limit and a few variable rate choices, including:
- A line of credit with accessibility until it depletes.
- Equal monthly payments are determined in advance, as long as one borrower lives in the home.
- Combination of both fixed monthly payments and a line of credit for a predetermined set time.
Choosing the HECM with the fixed interest rate, alternatively, will provide you with a one-time, lump-sum payment. Remember, the reverse mortgage will accrue interest monthly. And you’ll need to still have enough income to handle homeowners’ insurance and property taxes.
Be Cautious of These Terms and Situations
There are disadvantages to consider and cons to weigh before you decide if a reverse mortgage is right for you. Seniors should seek additional financial advice if they’re uncertain at all about how to properly budget the funds to ensure tax and insurance obligations continue to be met.
When it comes to paying back the reverse mortgage, there are other aspects to consider. For example, in many cases, should the borrower pass away, the payment obligation falls to the non-borrowing spouse. In these scenarios, repayment will subsequently be passed down to the estate and heirs of the estate to satisfy the debt. Federal mandates require heirs to repay the full loan balance or 95% of its appraised value, whichever balance is less.
What you may be worried about with reverse mortgages is losing your house. And as with any mortgage, there are conditions you’ll have to agree to with consequences should you default.
Violations to your reverse mortgage terms might include:
- Moving out of the home or leaving for “12 consecutive months,” says Michael Michelettii of Unlock Technologies. Traveling is acceptable. But when the property is no longer your primary residence, the reverse mortgage becomes due and payable in full.
- Not paying your property taxes and homeowners insurance is considered a violation of terms. Failing to cover these mandatory expenses could result in the mortgage becoming payable in full.
- You can choose to put your home up for sale, and the loan won’t be due unless you’re unable to no longer live there. Upon the sale of your home, the loan will come due, as well.
Beware of Reverse Mortgage Scams
Before you sign any binding contracts or agree to any terms and conditions, consult with a financial advisor or talk with your accounting professional. There are scams out there from companies and individuals disguising bogus financial transactions as reverse mortgage loans. One of the most common may present itself as a “contractor loan,” intended to help homeowners finance home improvements with their “contractor reverse mortgage.”
Another misdirection is the VA-sponsored reverse mortgage. Luring potential veterans and their families, these loans are not viable. The U.S. Department of Veterans Affairs does NOT approve reverse mortgages. So, if you spot deals or offers for reverse mortgages with VA labels or endorsements, they’re likely scams. Take your time when you’re reviewing any loan offer. And if at any point you feel pressured to sign, consider it a red flag and get a second financial opinion before taking any action.
Potential Alternatives to the Reverse Mortgage
If you’re not 62 years old yet or still have reservations about exploring your reverse mortgage options, you still have choices. A traditional home equity line of credit, for example, might be the best way to go. With HELOCs, you can similarly borrow against the equity in your home, usually with lower interest rates than what you’ll find with a reverse mortgage loan. Closing costs are also traditionally lower with HELOCs. Some other financial solutions to explore to improve your situation include:
- Downsizing and selling your home.
- Refinancing your home, in the event, you have not yet paid off your original mortgage.
- Financial assistance resources can help if you’re facing high utility bills, home repairs, or fuel payments.
With so many loan programs and potential lending options, it can be challenging to find the right solution for your situation. If you’re considering a reverse mortgage, keep these tips and suggestions in mind. And for all of your closing and title work needs, let New Door Property Transfer be your guide!