Questions to ask about the reverse mortgage process
Obtaining a reverse mortgage requires people to take a big step and borrow against the equity they’ve built in their homes over the years, and in many cases agree to sell the home once they die instead of passing it on to heirs. It’s a transaction that should not be entered into lightly.
As you think through the decision, here are several questions about the product and the process itself to talk through with your family and financial advisors.
Do I fully understand how a reverse mortgage works?
Reverse mortgages are complex financial products. As such, there are many myths and misconceptions about how they work. Make sure you fully understand the terminology involved, the way the contracts works and ultimately what you stand to gain from entering into such an agreement. Seek out the advice of objective experts when conducting research.
Will a reverse mortgage pay me enough to make it worth the transaction?
If you’re considering a reverse mortgage, it means you either own your home free and clear, or you have a small balance left on your conventional mortgage. It’s worth asking yourself as you think about your options whether you want to carry a large mortgage again, even though in the case of a reverse mortgage you don’t have to make monthly payments.
Seniors can also be surprised by the limit on how much they can borrow in a reverse mortgage. You cannot access the full equity in your home. Lenders will instead place a principal limit based on your age, the value of your home, and current interest rates. If the principal limit you qualify for won’t be enough to meet your financial needs, then it may be best to consider other options.
Should I consider waiting a few years before getting a reverse mortgage?
In any reverse mortgage, the amount available to the borrower is based on three factors:
- The borrower’s age—the older you are, the more you can borrow.
- The amount of equity in the home—the greater the value, the more you can borrow.
- The expected interest rate—the lower market rates are, the more you can borrow.
If these current factors don’t produce an adequate principal limit, then waiting a few years can potentially net you a larger limit, because you will be older and your home may appreciate in value.
On the other hand, you could also opt for a reverse mortgage line of credit, which has a growth feature that increases the amount of any unused credit each month or year.
Have I researched multiple reverse mortgage lenders to find the best rates and terms?
Prospective borrowers should take the time to research several lenders to find one that offers competitive rates and terms, and will be relatively easy for them and their families to work with.
You should start with one or more of the following reputable sources for reverse mortgage lenders:
National Reverse Mortgage Lenders Association. This is a trade association whose members have agreed to conduct themselves in a professional, responsible and lawful manner.
For reverse mortgages insured by the Federal Housing Administration (FHA), you should also search the list of lenders at the U.S. Department of Housing and Urban Development (HUD).
To see if a prospective lender has complaints made against it, you can look at websites like the Consumer Financial Protection Bureau’s Consumer Complaint database, ConsumerAffairs, and your local Better Business Bureau.
If possible, obtain referrals from friends, family members or acquaintances who have taken out a reverse mortgage and had a good experience. Also, if you work with a local money manager, CPA, attorney or other professional, they may offer an opinion on reputable lenders.