Questions to ask before committing to a reverse mortgage loan. Don’t make the mistake of just jumping into this loan, ask questions to your lender and to yourself to make sure this is the right financial product for your retirement.
1.) What do I need the money for?
There are no restrictions on the reverse mortgage as to how you spend the funds. This is not free grant money though so you should have a viable reason such as enjoying the equity in your home to pay down high interest debts to further improve your retirement cash flow. This would be a smart use of funds. Asking yourself this question before getting the reverse loan is critical to keep you out of making a bad financial decision. If you wish to purchase a car you are better off getting a car loan or a lease at a very low interest rate and not putting a loan on your property. Be wise in choosing when to take out a reverse mortgage and why you doing it. This is the first most important question we want all seniors to ask. If you need extra monthly income to pay for medical bills and or food expenses than utilizing the home’s equity is a perfectly viable option. Many seniors have gotten into trouble in the past by taking out a reverse mortgage thinking that the money is free to later on find out that they didn’t need the money (or they spent the money on something that they regret) to later on when needing that equity not having access to it.
2.) Do I expect real estate prices to increase or decrease?
If you believe real estate prices are going to increase at around 5%+ a year getting a reverse mortgage can give you access to your equity today with no real downside as the home’s appreciation will offset the accruing interest on the loan. If you believe that real estate prices are set to decrease any time soon the reverse mortgage loan can protect your current equity in today’s terms meaning you have less risk and up to 60% of your home’s value in the bank today. This is a great technique to protect your equity while giving you access to the equity in such a way that they bank can’t retract that offer (this is not the case with HELOCs or traditional mortgages were by the bank can close the credit line extend if home prices decrease).
3.) Do my heirs want/need the home?
This can be a sensitive subject for family members to discuss. Many heirs want to own the property outright but this is your equity and your retirement so the quality of it should be important to everyone in the family. We recommend that you discuss openly with your heirs and family your intentions to use the home’s equity. Being upfront and honest may lead to you having other options such as a private family reverse mortgage contract. Most importantly you will get input from other family members and they may express interest in assisting you more during your retirement (doesn’t have to be financially).
4.) Are there better cheaper alternatives?
Reverse mortgages were designed for senior homeowners who want to tap into their home’s equity without having a new mortgage payment. RMLD knows of only 1 alternative program but only seniors in CA/FL are eligible and the amount of funds loaned are significantly smaller compared to the reverse mortgage. If you are interested in learning more about this program fill out the contact form and we will be happy to assist you. Property values also have to be above $200k to qualify. This is not the case with a reverse mortgage but with an alternative program (a private program we have).
5.) Which lender will give me the most funds at the lowest fees?
We have learned that the only way to truly get the best deal on a reverse mortgage is to comparison shop reputable HUD approved lenders and get written quotes so you can review at your pace. You should always compare similar programs such as lump sum to lump sum as this will help you understand the different fees and how much will be available to you in the form of the HECM reverse loan.
6.) What happens after I pass away
When the homeowners on title pass away the HECM reverse mortgage comes due and payable with all the accrued interest. There are 6-12 months given for the estate/heirs to take action and decide whether or not they want to keep the home. If they do want the home the reverse mortgage loan needs to be paid back with all the interest that has been adding to it over time. This money can come from the sale of the property, other cash/savings from heirs/estate, and or from a new mortgage taken out by your heirs. If your goal was to leave your home paid off with no debts/liens than this program may not be suitable.
7.) What are the fees involved with this loan?
First thing first this is a loan and not free money from the government. There will be closing costs involved, out of pocket fees such as ordering the appraisal, and over time the balance you receive today as an equity release will accrue with the bank’s interest chargers (you will owe more as time goes on). Hopefully the property’s value increases at a similar rate to offset the interest charges from the loan causing you to keep the keep the same % of your home’s equity over time protecting your heirs inheritance. Fees for a reverse mortgage are higher than a cash out refinance but cheaper than going through a real estate transaction (buy/sell commissions to realtors). With that in mind these fees are coming from the equity in your home and are not a cash payment from your checking account. No monthly payments are necessary so if you use the HECM reverse to pay off existing debts (mortgages/credit cards) this can be a very effective way to dramatically improve your cash flow in retirement.
8.) Will my heirs be responsible for paying the debt?
No. The loan has a non-recourse feature whereby it protects the heirs from being obligated to pay back the loan. The heirs have a choice to walk away from this obligation and any remaining equity from the sale of the home will go to your heirs/estate. This is an important feature because imagine if your HECM loan balloons to be more than what the home is worth one day (who would want to pay that off – makes no sense). The insurance fee associated with this loan is used to protects the borrower and the banks. This is a very unique feature that only the HECM reverse mtg has.