A reverse mortgage is a loan for homeowners 62 and older who wish to borrow against the value of their home without making monthly payments. This mortgage product can assist senior citizens who lack sufficient funds for daily expenses. Those who wish to diversify their sources of retirement income but also hedge against risks such as market declines and outliving their savings can also benefit from this strategy.
A reverse mortgage requires you to spend a substantial portion of your home equity on loan fees and interest. In addition, the terms of the loan may place the homeowner, spouse, and heirs at risk of losing money and then a place to live.
Here are four situations in which a reverse mortgage may be advisable, and four in which it may not.
• Although a reverse mortgage may be ideal in certain circumstances, it is not suitable for all senior homeowners.
• Due to the upfront costs, a reverse mortgage may be an expensive option for anyone planning to move soon.
• Prospective borrowers should realize how spouses, partners, roommates, and heirs may be affected by a reverse mortgage.
• Under the right circumstances, a reverse mortgage can be an excellent tool for long-term financial security in retirement.
When Reverse Mortgage Makes Sense
A reverse mortgage may be a valuable problem-solving tool for seniors who understand how these loans function and have a plan for their equity. Here are four instances in which this loan may be prudent.
This article's guidelines pertain to home equity conversion mortgages (HECMs), which are insured by the Federal Housing Administration (FHA).
You have no plans to relocate soon.
If you're considering a reverse mortgage, you should plan to stay in your home for the foreseeable future. This rule of thumb is not exclusive to reverse mortgages; it also typically makes no sense to obtain a new forward mortgage (such as a refinance loan) on a home that is about to be sold. The reason? Loan origination fees.
These are the approximate costs associated with home equity conversion mortgages.
If you plan to move before the loan's financial benefits outweigh its costs, it may not be prudent to pay these amounts. Moving is one of the events that triggers the repayment of a reverse mortgage. After seller fees and HECM repayment, the proceeds from the sale of your home may not be sufficient to support your next step, such as downsizing, assisted living, or paying a family member for caregiving.
Your spouse is at least 62
All reverse mortgage borrowers must be at least 62 years old. If your spouse is younger than 62, a reverse mortgage is not the best option. Though new laws may safeguard your non-borrowing spouse from losing the home if you pass away first, non-borrowers cannot receive funds from the loan after the borrower dies. This means there will be no further credit draws or monthly payments, and the surviving spouse may lose a significant source of income.
If you and your spouse are each 62 or older and titled as owners on your home's title, obtaining a reverse mortgage together might be a great option.
You can meet the financial and physical home ownership requirements
If you have a reverse mortgage, keeping up with your property taxes, homeowners insurance, as well as home maintenance is essential. If you fall behind on your payments, the lender may declare the loan due and payable.
If you fail to pay your property taxes, the county tax authorities can put a lien on your home, seize it, and sell it to recover the amount of taxes owed. The tax authority has priority over the lender over your property. Therefore, if you fail to pay your property taxes, the lender's collateral (your home) is at risk. Therefore, lenders require borrowers to maintain tax compliance.
Notice: Some municipalities offer property-tax deferral and home repair assistance programs to homeowners aged 65 and older in order to assist them financially. In addition, some homeowners insurance businesses might provide premium discounts to retirees.
If you fail to pay your homeowner's insurance premiums, the lender's collateral is also at risk. If your house burns down, there’s no insurance to cover the costs of rebuilding. Your lender doesn’t want to get locked with a burned-out shell of a house that isn’t worth nearly what you owe.
Delaying home maintenance causes your home's value to decrease. If you don't replace a deteriorating roof, for instance, your home could sustain significant water damage from rain or snow.
During the reverse mortgage financial assessment portion of the HECM application process, prospective lenders will evaluate your ability to meet these obligations. If you do not, they will reduce the amount you can borrow and place the difference in an escrow account to keep you current on your payments. However, you will still need sufficient physical or cognitive ability in addition to sufficient funds to keep your home in good condition.
Your residence is just an asset.
Some people have sentimental value on their homes. If your home has been in your family for decades or generations, your children may wish to continue the tradition.
There are ways for heirs to repay a reverse mortgage and keep the property, but the loan complicates matters. If your home is merely an asset, however, it may be best to leverage it for a more comfortable retirement.
When the Reverse Mortgage Doesn't Make Sense
We've already discussed situations in which a reverse mortgage may not be the best option: if you're uncertain about how long you'll remain in the home, if your spouse is ineligible to be a co-borrower, if you'd struggle to maintain the property, or if the home has sentimental value to your family. Let's examine some circumstances in which a reverse mortgage may not be appropriate.
You do not have enough equity
To be eligible for a reverse mortgage, you must own your home outright or have at least 50 percent equity. The exact amount of equity required to qualify for a home equity loan varies depending on your age, the payment plan you choose, and the interest rates.
After paying off your existing mortgage balance, you must have sufficient equity to receive a reasonable lump sum, monthly payment, or line of credit from a reverse mortgage (provided you still have one).
By obtaining quotes from at least three lenders and undergoing reverse mortgage counseling, you can determine if you have sufficient equity and how much you could borrow under each reverse mortgage payment option. If none provide the cash you require, an alternative may be more helpful.
For instance, selling your home would enable you to withdraw all of your equity, as opposed to just a portion of it (as is the case with a reverse mortgage). Buying a home with a lower price tag, renting, or moving in with family may be a better option.
When Someone lives with you
If you have roommates, relatives, or friends living with you who are not co-borrowers on your reverse mortgage, they must be prepared to move out if you die before them. If you move out for more than a year, your co-occupants may also be required to move out. (Exceptions are made for eligible non-borrowing spouses.)
Under reverse mortgage regulations, moving into a nursing home or assisted living facility for even more than 12 consecutive months is considered a permanent move. Seniors frequently relocate for medical reasons without prior notice, and household members should be aware of this possibility.
To qualify for a reverse mortgage, borrowers must occupy the property as their primary residence. In order to avoid foreclosure, borrowers are required to certify annually in writing that they continue to reside in the home used as collateral.
If someone relies on you for housing (and you are willing to continue the arrangement), you may wish to forego the reverse mortgage and leave your home to them in your will or trust. Adding someone to the title of your home will not shield them from reverse mortgage foreclosure (and may create new problems, too).
Your residence has sentimental worth
When the last reverse mortgage borrower dies, the loan will become due and payable. Those who wish to retain ownership of the property may pay the reverse mortgage balance to the lender. They will require either cash or another mortgage to repay the loan.
If your heirs are unable or unwilling to repay the loan, the lender will sell the property to recover the debt. Any surplus between the sale proceeds and the loan balance is transferred to the borrower's estate. Federal Housing Administration (FHA) insurance will cover a negative balance. The inheritors receive nothing and owe nothing as well.
You have health issues
Homeowners of retirement age who have health issues may consider a reverse mortgage to cover medical expenses. However, if your health deteriorates to the point where you must relocate, the loan must always be repaid in full because the home is no longer the borrower's primary residence. If you may need to relocate due to health or disability, a reverse mortgage is probably a bad idea because its upfront costs are unlikely to pay off in the short term.
Typically, homeowners who abruptly vacate or sell their home have only six months to repay the loan. And despite the fact that borrowers may retain any sales proceeds in excess of the loan balance, thousands of dollars in reverse mortgage fees will have already been paid out.
How Much Does a Reverse Mortgage Cost?
Home equity conversion mortgages (HECMs), the most prevalent type of reverse mortgage, incur a variety of one-time and recurring fees. The most important of these are origination fees, any other closing costs, mortgage insurance premiums, and the interest the borrower accumulates on the loan balance.
Can You Leave Behind a Reverse Mortgage?
If your mortgage balance exceeds the value of your home and you can no longer afford to keep it, you have several options. You can perform a deed in lieu of foreclosure or abandon the property and allow the lender to foreclose. Reverse mortgage loans are non-recourse, and the debt cannot be transferred to the borrower's estate or heirs.
When must I repay my reverse mortgage?
Generally, reverse mortgage loans must be repaid once you move out of the home, sell the home, or you die. However, the lender can also demand repayment if you fail to pay property taxes or homeowners insurance, or if you stop maintaining your home.
Can I reverse my decision after signing?
According to the FTC (Federal Trade Commission), "with most reverse mortgages, you get at least three business days after closing to cancel the deal without penalty". "To cancel, you must provide written notice to the lender. Send your letter by the certified mail, and ask for a return receipt. This will allow you to document when and what the lender received. Keep duplicates of all your correspondence and any attachments. After you cancel, the lender has twenty days to return any financing payments you've made."
The Bottom Line
Consider how your current circumstance may evolve in the future, regardless of its current state. In the following scenarios, will a reverse mortgage be beneficial or harmful?
Reverse mortgages are not the best financial option for everyone, and you may have other alternatives, such as selling your home and downsizing. Homeowners of retirement age may also consider renting, which alleviates homeownership burdens such as property taxes and maintenance. Other options include forward mortgages like home equity loans, home equity lines of credit (HELOCs), and cash-out refinancing; however, all of these require excellent credit worthiness and sufficient income or assets to cover monthly payments.
Reverse mortgages, specifically the line of credit payment plan, can be useful in a variety of circumstances. They can provide a source of emergency funds or diversification of income, help pay for in-home care, and serve as a source of nontaxable income (because the money is a loan), so they will not affect your income tax rate or Medicare premiums.
Even if a reverse mortgage is an expensive and less-than-ideal option, it may be your best option given your circumstances. If the loan proceeds will increase your long-term financial stability, unless you plan to stay in your home for so many years, if you can manage the ongoing costs of homeownership, if your spouse is at least 62 years old, and if you do not intend to leave your home to anyone, you may qualify for a mortgage.
0 Comments
Post a Comment