Reverse mortgages have received a lot of attention recently. If you're a homeowner nearing retirement age, you've undoubtedly seen numerous TV commercials or heard radio advertisements about reverse mortgages. These loans may appear to be quite appealing, especially if the bulk of your net worth is tied up in your house. However, there are also several major drawbacks. If you're considering this sort of loan, remember to consider all of the pros and cons of reverse mortgage first.
A reverse mortgage is a type of home loan for home owners who are 62 years or older, are current on their mortgage, have enough equity in their home to qualify, and are not currently paying for any other home loans. The loan amount is approved by the lender after all of these requirements have been met.
If you're a homeowner in your fifties or sixties, you've undoubtedly seen many TV commercials or heard radio advertisements about reverse mortgages. These loans may appear to be quite appealing, especially if the majority of your net worth is invested in your property. However, there are certain drawbacks.
If you've been thinking about taking out a reverse mortgage, first examine all of the benefits and drawbacks before making a decision.
If the value of your home decreases, so does the amount you can borrow against it. Reverse mortgages typically have adjustable rates, which could potentially increase over time if current interest rates change dramatically. However, locking in at today's rate gives borrowers peace of mind that their costs won't suddenly rise just because another housing crisis has hit the market again.
Consider which of the three types of reverse mortgages might be best for you as you evaluate whether a reverse mortgage is appropriate for you.
Single-purpose reverse mortgages are the least expensive option. Some state and local government agencies and non-profit organizations provide them, but they aren't accessible everywhere. These loans are restricted to one purpose only, which the lender specifies. For example, the lender may limit the loan to just paying for home improvements, repairs, or property taxes. Most homeowners who earn less than or equal to $60,000 per year can qualify for these loans.
Proprietary reverse mortgages are private loans backed by the companies that develop them. A proprietary reverse mortgage can provide you with a more significant loan advance if you own a higher-valued property. So, if your property has a greater appraised worth and you have a minimal mortgage, you may be eligible for more funds.
Home Equity Conversion Mortgages (HECMs) are federally-insured reverse mortgages backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose.
The upfront fees of HECMs and proprietary reverse mortgages might be greater than those of traditional home loans, and they can be pricey. It's crucial to realize this, especially if you just want to stay in your house for a short time or borrow a small sum.
The reverse mortgage is a product that is available to all homeowners, regardless of their age. The borrower simply gets a lump sum out in one go. In some cases, the purpose of this kind of money is to pay off the debt that needs to be paid off on the property that is being mortgaged.
A reverse mortgage can help you live a more secure life in retirement. It can also help protect your financial future and may even allow you to leave an inheritance to your children.
As long as you meet all the requirements, such as being at least 62 years old, owning and living in the home, and not currently having another active mortgage on the property, your loan will be approved. You don't have to make any monthly payments or maintain a minimum balance each month like other mortgages.
If you pass away while there is still money owed on your reverse mortgage, the lender cannot attempt to collect their payment from any inheritors of the home. You are the only one responsible for meeting your financial obligations, so it will be up to you to pay back what you owe.
Reverse mortgage loans and other types of home equity lines of credit (HELOCs) can be a very tax-friendly way to access money when you need it. There aren't any taxes due on the initial loan, and there isn't much in the form of taxes when money from your HELOC is used during retirement years.
It's possible to borrow against your reverse mortgage even before you've reached age 62 if it's for a good cause, such as college tuition or medical bills. No penalties are among a few of the reasonable pros of reverse mortgage. You may also be able to take out money earlier if your spouse dies, you move out of the home, or your property goes into foreclosure. While you will have to pay back all the money eventually, you won't incur a penalty for doing so early.
The equity in a person's home can be used to purchase a house, pay for an emergency, or even take an extended vacation. A reverse mortgage is considered one way of using this equity. With many benefits to using this financial strategy, it does come with some risks you must consider. Here are some cons of Reverse Mortgage to think of.
If you're still paying off another loan on top of your reverse mortgage and can't afford to make any extra payments on it, what do you think will happen when the value of your home declines? In most cases, this type of situation results in foreclosure.
Those who take out a reverse mortgage must be prepared to pay back the loan within a certain time frame. If you choose not to try and re-sell your home, you'll need to work with trying to sell it or leave an inheritance for any inheritors of the property.
Not only do borrowers have to pay half of their mortgage insurance premiums when they first take out a reverse mortgage, but they also end up having higher interest rates on their loans since these kinds of mortgages are considered "riskier." Some loans may even have fees for early payoff, which means you'll end up having to pay interest on the money you owe until you sell your home.
At closing, borrowers can expect to pay anywhere from 1% - 4% of the loan balance in upfront mortgage insurance premium (MIP) costs. This amount is nonrefundable if borrowers decide later they don't want to take out their reverse mortgages anymore. This way, the additional fees turn out to be among many cons of reverse mortgage.
It's easy enough for a lender to foreclose on a reverse mortgage since it's considered an acquisition loan. This means that the borrower doesn't have to make monthly payments or maintain a minimum balance each month like other loans. You will owe the amount your home is worth on the date of foreclosure, which may be more than what you've borrowed if real estate values have increased over time.
Conclusion on the Pros and Cons of Reverse Mortgage
Reverse mortgages can provide borrowers with funds for major expenses or home improvements, but they come with risks. Your lender may foreclose on your property if you don't keep up payments and or pay back the loan by its deadline. Interest rates are also higher than conventional loans since these types of mortgages are considered riskier.
The disadvantage of a reverse mortgage is that you are using the equity in your home while still living. Your heirs will receive less money after you die. Another potential risk is that taking out a reverse mortgage too soon might cause you to have second thoughts.
Reverse mortgage payments may not be enough to cover property taxes, homeowners insurance premiums, and home maintenance expenses. Lenders might call a reverse mortgage due if one fails to keep up with any of these things.
Reverse mortgage frauds are designed to deprive homeowners of their equity and leave them with nothing in the end. Reverse mortgages are a problematic loan, making them ideal prey for scammers.
The maximum amount you can borrow is based on the equity in your home. You can usually only borrow up to 80% of the value of your house, depending on its appraisal. However, most people will receive far less than this. As of 2018, the highest reverse mortgage payment ever made was $679,650.