Pro & Cons of a Reverse Mortgage
Do you understand all of your financial options? A reverse mortgage can be a great tool for retirement planning, but it’s important to know exactly how the reverse mortgage works to understand whether or not it’s right for you. Financial experts are endorsing reverse mortgages more and more as the first course of action. Financial planners are incorporating reverse mortgages into their standard retirement plans. For some seniors, outright sale or refinancing are the best options. For others, reverse mortgages offer a sensible, federally secure, and sustainable way to create financial stability in retirement.
Learn and understand your options. Compare and contrast a reverse mortgage against other financial options. If you pursue a reverse mortgage, you will get the chance to speak with a HUD-endorsed, third-party loan counselor, who will help you understand all your options, so you can make the best choice in confidence.
Pros of a Reverse Mortgage
Immediate access to tax-free income
Homeowners 62 years or older can easily access tax-free reverse mortgage proceeds without the credit and income requirements of traditional mortgages. In fact, there are very few requirements and even fewer documents are required. To get a reverse mortgage at least one homeowner must be 62, the home must be maintained, kept as the primary residence, and the homeowners continue to pay the property taxes and insurance. (Summarize required docs?) The minimum documentation required are statements for all mortgages, a copy of your trust (if applicable), and proof of date of birth, social security number, homeowners’ insurance, and HUD counseling certificate.
A home is often a person’s largest nest egg for retirement. Reverse mortgages offer the opportunity to unlock this retirement “savings account” without having to sell. Borrowers can tap these funds while living in the comfort of their own home without mortgage payments until they sell, permanently move or pass away.
Reverse mortgage proceeds are tax-free and don’t affect regular social security or Medicare benefits. This means access to more income with less worry.
Remain in your home
Most seniors prefer to live in their homes as long as possible, but if financial resources in retirement are slim, it can be difficult to make ends meet, and sometimes even to make mortgage payments. Reverse mortgages help these homeowners by using the reverse mortgage loan amount they qualify for to pay off their current mortgage. This eliminates the mortgage payment and provides the right to lifelong residency. Simply continue to use your home as your primary residence, maintain it, and pay the property taxes and insurance (which may alternatively be escrowed) and you’ll never have to worry about a mortgage again. Start enjoying the retirement you deserve.
Protect yourself and your home against declining property value
HUD-approved reverse mortgages are non-recourse loans insured through the federal government. This means that the borrower may never be held responsible to pay more than the amount of the sale of the home at its current value, even if property values go down. A drop in the real estate market won’t diminish the income borrowers can access from their home, and it won’t cause borrowers to owe more than the property is worth. If you are on a monthly payment plan for life, and suddenly the property values drop, this does not change your payment at all. Likewise, when property values rise, your payment remains the same. You can, however, refinance a reverse mortgage at a later date if your property value rises, and possibly get more money from the loan.
Enjoy your hard earned retirement
Scarce financial resources keep many seniors from enjoying their retirement, but a reverse mortgage can unlock hard-earned equity as income. After having worked hard to build a life and a career, seniors with equity deserve financial security, and to be able to enjoy their homes and families. Reverse mortgages are a simple, risk-free way to make this a reality.
Cons of a Reverse Mortgage
Higher fees than a standard mortgage
Reverse mortgage fees can be higher, lower or comparable to standard mortgage fees. Reverse mortgage fees fall into three main categories. Origination fees are the first category. Origination fees range from $0 to $6,000. This fee is based on the property value and type of reverse mortgage product. Mortgage insurance premiums are the second category. The mortgage insurance premium varies based on the amount of money you borrow within the first 12 months. This fee goes to FHA to ensure the loan. Jumbo reverse mortgages do not have this fee. The third category of fees is made up of third-party fees. This includes fees such as title, appraisal, notary, etc. These fees are typically the same fees required for traditional loans.
A reverse mortgage converts a home’s current equity into income, which may reduce the homeowner’s equity. The amount of equity in a home depends on the property value and mortgage balance. The balance on a reverse mortgage increases because no mortgage payments are required. (Although it does not prohibit payments on the reverse mortgage, payments can be made at any time, in any amount) Home values go up and down with the market so the amount of equity varies. The borrower or their heirs will have less equity if the mortgage balance goes up faster than the value of the home and they decide to sell.
Mortgage loans are non-recourse loans. This means the borrower is federally insured from ever owing more than the house is worth (or, “owning more than the proceeds from the sale of the home”)- even if the property value declines.
You must remain living in your home
Critics of reverse mortgages often point out that the homeowner must meet the obligations of the loan, or risk losing their home. Reverse mortgages require homeowners to keep the mortgaged home as their primary residence, not vacating it for longer than 364 days. This means that if the last remaining homeowner no longer maintains the property as his/her personal residence, then the loan becomes due. The owner(s) or heirs may refinance the property and pay off the lender at any time. If the last borrower of the reverse mortgage has moved out of the property and the title has passed to the heirs, the estate can either sell the property and keep the remaining equity or refinance the property. The property must also be maintained and homeowners insurance and property taxes paid, or the loan becomes due.
For those in the market for a new home, there is the HECM for Purchase. It’s a reverse mortgage designed for purchasing a new home. This type of purchase loan doesn’t require monthly mortgage payments. Simply provide the down payment and the reverse mortgage covers the rest. A reverse mortgage for purchase is a great alternative to paying cash for a house. The money saved can be used for home improvements or left in the retirement account. It’s especially attractive for homeowners downsizing. They can hold on to more of their cash and still accomplish the goal of buying a new home without having to make monthly payments.