There are many factors which need to be considered to answer this question, we will cover everything on this page about whether or not you should be considering a reverse mortgage.
Top Reasons why a reverse mortgage loan rocks and its a good idea for you.
1.) Ability to access equity without selling your home.
2) Ability to set up a credit line that grows over time.
3.) Ability to receive monthly income that is guaranteed for life.
4.) Only program that can eliminate your monthly mortgage payment.
5.) The longer you live the more guaranteed income at times exceeding your homes value – can be a very good return on your home equity with no risk.
6.) Income is tax free that can be very substantial in your retirement when you are living off fixed income.
7.) Access to your equity can mean paying off any high interest loans freeing up even more income.
Factors you need to take into account for your retirement:
§ your age ( the older you are the more equity you can take out, longevity is the biggest risk in retirement, how long will you live? this is a tough question to answer – therefore the reverse mortgage allows you to receive lifetime monthly income for life eliminating this risk ( a smart option for sure).
§ love your home? – do you plan on staying there for long term, if so this is a smart decision as there are costs to the program, and those who live in the home for at-least 5-10 years get the full benefits ( no payments – and home price appreciation so when they sell they can be in the positive equity territory).
§ how much equity is available ( important for qualifying into the program, also should dictate the option you select to receive the income/funds – the more equity you have the more risk you can take -you can take out a lump sum – and invest some of the money which would offset the borrowing costs).
§ closing costs and interest rates – currently all of the lenders/banks we work with all aggressively pricing the loans with favorable terms for the seniors – low interest rates and no closing costs/fees – by comparison shopping we are able to compare apples to apples and scure you a great loan.
§ your other investments – if you have a portfolio of investments you need to balance it with the reverse mortgage, depending on your retirement strategy we can help you make a general plan of which assets to hold etc ( your financial planner can also advice you )
Factors alone are not enough to make this decision, we tell customers that a round financial analysis is needed – how much liquidity do you have with your investments – do you have another property – income? only social security or do you receive a pension – how aggressive is your investment strategy in your retirement? these are just some of the though questions you need to review – if you are using the reverse mortgage to simply give you more money before you decide to sell in a few years you probably dont need to over-think – but if your home is your only asset this is a huge decision and needs to be taken seriously.
Reverse mortgages are sometimes the only option that will allow a senior to tap into their home’s equity without having to sell the home. A cash out refinance is usually out of the question since seniors will find it difficult to qualify based on the income and credit scores.
Media has the perception that reverse mortgage closing costs are expensive but compared to what ? Selling the home will likely lead to real estate fees which can add up to over 6%, and you will most likely have to purchase another home.
4 requirements to qualify for reverse mortgage
Who Can Qualify For a Reverse Mortgage Loan
§ must be 62 or older
§ must own the home
§ must have equity available in the home
§ never have paid late or defaulted on government debt
§ must be your primary residence
Is a Reverse Mortgage Right for You?
The oldest of the baby boomers began turning 65 on Jan. 1, 2011. On that day and on each day thereafter for the next 19 years, approximately 10,000 people will reach the age of 65, according to the Pew Research Center. As they grow older, this significant segment of the population will face a range of challenges, including the ability to age in place. First introduced in 1989, reverse mortgages could be the ideal solution.
What Is a Reverse Mortgage?
Reverse mortgages are designed to make it possible for seniors age 62 and older to tap into the equity of their homes by reversing payments so that the lender actually sends payments to the borrower. As the baby boomer generation continues to age, it is expected that reverse mortgages will continue to gain in popularity as an effective method for covering living expenses.
Compared to traditional mortgages, which begin with a large balance that decreases as the borrower pays the lender, reverse mortgages work in exactly the opposite manner by beginning with a zero balance that increases as the borrower is paid by the lender. In order to qualify for a reverse mortgage, the following requirements must be met:
The homeowner must be a minimum of 62 years of age.
The homeowner must own the home outright or have a mortgage with a balance low enough that it can be paid off with a new loan.
The subject property must be a single-family home or a two- to four-unit home with at least one unit occupied by the borrower.
How Much Can You Borrow with a Reverse Mortgage?
The amount of money that you are able to borrow with a reverse mortgage is determined based on a variety of factors, including the value of your home, the applicable interest rate, your age, and the amount of any liens against your home. In the event of multiple borrowers, the age of the younger borrower is used. Generally speaking, the more equity that you have in your home and the older that you are, the more money you will be able to receive.
The proceeds from a reverse mortgage can be accepted in five different ways. You may:
Receive payments on a monthly basis for a specified period of time.
Receive payments on a monthly basis for life.
Receive the entire balance of the loan as a lump sum.
Establish a line of credit.
Choose a combination of the above options.
For homeowners considering a reverse mortgage, it is important to understand that you may be required to attend counseling sessions prior to completing your reverse mortgage. The goal of such counseling is to ensure that you understand what you are committing to prior to taking out a reverse mortgage loan.
Heirs and Reverse Mortgages
So, what happens after you are gone and the property changes hands? One of the most common misconceptions regarding reverse mortgages is that the lender will receive an equity share in the property, according to a report published by The New York Times. This is actually not the case. A relationship does exist, but it is similar to the type of relationship that exists between any lender and borrower.
As a first lien holder on the home, the lender will be entitled to being repaid before any other lien holders when the property changes hands. Federal regulations stipulate that the lender must provide heirs with up to 30 days to make a decision regarding how repayment will be handled. Repayment will often depend upon the amount of equity left in the home as well as whether heirs have a desire to keep the property. After making a decision regarding repayment, heirs are then able to take up to six months to arrange financing or sell the property. If the home fails to sell for a sufficient amount to pay back the loan in full, heirs will not be responsible for any shortfall.
Reverse mortgages do have a bad side. There are many reasons to avoid taking a reverse mortgage loan on your primary residence. Your equity is typically in America the biggest source of wealth and you need to get educated to protect this wealth you have accumulated. After writing and reviewing the negatives of this loan, we must say that for the majority of seniors this is a viable program for retirement success. If you have questions or concerns after reading this article please get in touch with us so we can explain in more details for your specific case. Everyone has different retirement goals, wealth/financial accumulations, and expectations of how they want to retire. Ultimately we wish you the best of luck in your retirement and we know that by being educated, and by comparing multiple quotes we can assist in the retirement of many in the US.
1.) Fees/Closing Costs/On going fees
There is no free lunch. Reverse mortgages are NOT free. This is not a free grant or a special program that benefits seniors without there being fees involved. The bank you deal with has to make fees to pay its employees and to keep its lights on. Reverse mortgages are more costly than a traditional home equity line of credit (HELOC – home equity loan) but it is also cheaper than doing a real estate transaction such as selling/buying a home. The media has portrayed the fees as being outrageous but this is the only program that allows a mortgage payment to be eliminated in retirement guaranteed without having to sell or move (which is very expensive on its own). For this convenience and to be able to utilize a reverse mortgage naturally there are fees. How much can you expect to pay in closing costs? $10K+ in closing costs and fees is expected. The higher the home value the higher the amount you will pay in fees. Some of the fees go directly to FHA, which is an insurance to protect both you and the lender. It makes sure you receive your payment from the bank no matter what happens to real estate prices, it also protects the lender from your home decreasing in value substantially that they will get paid.
2.) Less equity for your heirs
The more equity you tap into the less equity potentially there will be for your heirs. Potentially because your home can increase in value dramatically over the course of your reverse mortgage growing much faster than the interest you accumulate on the loan. Then you would be in a position of having more equity for your heirs (or breaking even). There is a risk/chance that the equity is decreased substantially as well. As you borrow, if home prices decrease this could be a double whammy. If your heirs are comfortable financially and do not want to inherit the home this is not a down side or a bad thing. If they are wanting to inherit the home this may be a concern if home prices in your area are weak or don’t grow at a rate faster than the rate the bank is charging you for the HECM loan.
3.) Interest rate accumulation -Negative amortization
The amount of money you borrow from a reverse mortgage has an interest rate attached to it. The longer you keep your reverse mortgage loan, the more the loan balance grows over time. This is the reverse of a normal traditional forward mortgage loan that you make monthly payments towards. As mentioned above if your home goes up in value dramatically this may not be an issue for your heirs. If you live for a very long time and the home value decreases substantially past what you owe on your reverse mortgage loan, there is a loan feature called, non-recourse which protects your heirs from not paying more than what the home is worth. This is a very good feature to protect consumers and their heirs.
4.) More difficult for your heirs to inherit the home
Your heirs will have to at the time you pass pay back your reverse mortgage loan if they want to keep the home. For many this may not be a possibility. They can take out a mortgage to pay off your reverse mortgage loan that is an option. The rules state that the heirs will not have to pay back the reverse mortgage if they don’t want to keep the home. This is a good point since they are not obligated to buy back the home from the bank. If there is equity left in the home then the heirs will receive that equity after the sale of the home.
5.) If you are being sold into an annuity or another investment with your proceeds, avoid.
If your reverse mortgage broker or financial planner is telling you to get a reverse mortgage to then make an investment you need to avoid this transaction. This could be a scam deal, one where you are going to pay a higher interest rate on your reverse mortgage vs what the investment will yield for you as a total return.
6.) If you are planning to move within a few years avoid the reverse mortgage.
Do not take reverse mortgage loan if you are planning to move with a few years time. This won’t make sense as the fees only make sense paying when you are going to stay for a long time. A few years in a home to avoid a mortgage balance or take out some cash may not be the right decision as the fees will eat into your equity initially quite substantially.
7.) Health issues.
If you have health issues you may want to avoid a reverse mortgage loan if you can. If you need to go to an nursing home or care facility for a period of 12 months or longer the bank can call the loan due and ask for you to pay back the loan. Banks are understanding but there are some restrictions regarding how long you can be away from the home (this needs to be your primary residence and you need to live in the home for 6 months out of the year). Most banks would give you an extension if you explained your situation but its another reason to avoid a reverse mortgage.
8.) Younger spouse
You may want to avoid taking a reverse mortgage right now if your spouse is not yet 62. This will limit how much funds you are able to borrow and also add more risk to the deal. If something happens to the spouse who is over 62 the loan can come due unexpectedly and the younger borrower could be put into a tough financial situation. Reverse mortgages are meant for those seniors who are 62 years of age or older to enjoy. While its possible to take reverse mortgage loan if you are not yet 62 (at least one borrower is 62) there are added risks to this transaction and more limitations on the funds/proceeds.
9.) Physically not fit.
Your property needs to be maintained and for some this is not possible with a physical disability. You could use the funds from the reverse mortgage to hire help but something that you should be aware of. FHA and the banks expect the property to be maintained.
10.) Property taxes/insurance/maintenance
You are obligated to pay for property taxes and insurance as well as maintenance. While this also applies without a reverse mortgage loan it is very important you budget your funds to cover the property taxes and insurance.
11.) Major home repairs:
Any major repair to the property will be to be done before or while the reverse mortgage loan is in process. An FHA appraisal will determine the value of your home and the condition it is in. Condition is important as mentioned above as it needs to be upkeep by the consumer. If a roof needs to be replaced expect this fee to be deducted from your equity and any from the amount you would have instead received. For some this is not a negative as either way this would have been done on your part from the proceeds.
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