In this video, I'll explain some things you need to know before you ever consider a reverse mortgage.
You definitely need to watch this video until the end so you’ll be fully aware of all the benefits as well as the pitfalls.
Reverse mortgages are usually taken out by seniors. Here are the main reasons why.
- They want to continue to live in their own home
- Their Social Security benefits and retirement savings don’t cover their living expenses
- They have debts or medical expenses
- They can’t afford repairs needed on their home
The lowdown on a reverse mortgage
A reverse mortgage is a type of loan that allows homeowners, usually seniors, to convert part of the equity in their home into cash without having to sell or move out of their home.
It's called a "reverse" mortgage because, unlike a traditional mortgage where the borrower makes payments to the lender, the lender in this case will actually make payments to the home owner.
This way the home owner borrows money on their property so they can cover their living expenses without moving out of their home.
The loan amount you can receive through a reverse mortgage depends on various factors, including your age, the value of your home, current interest rates, and the specific program you choose. Generally, the older you are and the more valuable your home is, the higher the loan amount you may qualify for.
How does it work?
To qualify for a reverse mortgage, you must normally be at least 62 years old, and own your home with substantial equity of about 50%.
The home must be your primary residence, and you need to have sufficient financial resources to cover property taxes and insurance, as well as maintenance expenses on your home.
What kind of reverse mortgages are there?
There are three main types of reverse mortgages: They are…
- Single-purpose reverse mortgage
- Proprietary reverse mortgage, and
- Federally insured Home Equity Conversion Mortgage
This is the most common type and are regulated by the Department of Housing and Urban Development.
What are the requirements?
To keep the reverse mortgage active, you must continue to live in the home as your primary residence, you must also maintain the property, and you must stay current on property taxes, homeowners’ insurance, and any other obligations related to your home. If you fail to meet these requirements, the loan may become due and payable.
Interest and fees:
Like any mortgage, a reverse mortgage accrues interest. However, with a reverse mortgage, you're not required to make any monthly payments. The interest and fees are added to the loan balance each month. The interest rate on a reverse mortgage is usually higher than on a traditional mortgage.
Additionally, there are usually fees associated with taking out a reverse mortgage, such as origination fees, closing costs, mortgage insurance premiums, and fees for servicing the loan.
A reverse mortgage loan is not free money. It’s is a loan where you or your heirs will eventually have to pay back the loan, usually by selling the home.
It’s extremely important that you realize, that with a reverse mortgage loan, the amount you, the homeowner, owes to the lender goes up over time, NOT down.
Repayment of the loan:
As I explained earlier, with a reverse mortgage, you don't have to make monthly payments like you would on a regular mortgage. The loan becomes due, either when you…
- Move out of the home
- Sell the property
- Or pass away
At that point, the loan needs to be repaid. Typically, the loan is repaid by selling the home. Any remaining equity after paying off the loan belongs to you or your heirs.
Pros and Cons
Like most anything in life there are advantages as well as disadvantages with a reverse mortgage.
Here are four main advantages:
- You Can Stay in Your Home: Reverse mortgages allow you to stay in your home while accessing its equity. This can be particularly beneficial if you have an emotional attachment to your home or if moving would be inconvenient or costly.
- No Monthly Payments: One of the primary benefits of a reverse mortgage is that you don't have to make monthly payments. This feature can help seniors who have limited income or want to reduce their monthly financial obligations.
- Supplement Retirement Income: A reverse mortgage can provide a source of income for seniors who are cash-strapped but have substantial home equity. It can be used to cover daily expenses, healthcare costs, or other financial needs.
- Non-Recourse Loan: Reverse mortgages are typically non-recourse loans, which means that the loan amount cannot exceed the value of your home when it's sold. This protects you or your heirs from owing more than the home's value.
Now here are some potential disadvantages of a reverse mortgage you should look out for and seriously consider before you take out a reverse mortgage:
- Long-term Commitment: Reverse mortgages are intended to be long-term commitments. If you decide to repay the loan and move out of the home within a short period, you may end up paying significant fees and closing costs for a relatively short-term benefit.
- Accumulating Debt: As interest and fees accrue over time, the loan balance of a reverse mortgage increases. This means that the equity in your home decreases over time. If you're planning to leave the home to your heirs, they may inherit a reduced equity or have to sell the property to repay the loan.
- Costs and Fees: Reverse mortgages can have substantial upfront costs, including lots of fees.
- Reduced Home Equity: As you receive funds from a reverse mortgage, the equity in your home decreases. This means that you'll have less equity available for other purposes, such as downsizing, moving to a different location, or using the equity for emergencies.
- Effect on Eligibility for Assistance Programs: Depending on where you live, the funds received from a reverse mortgage might be considered as income and could affect your eligibility for certain means-tested government assistance programs, such as Medicaid or Supplemental Security Income . It's important to consult with a financial advisor to understand the potential impact.
- Interest Accumulation: Since reverse mortgages accrue interest over time, the loan balance can grow substantially, especially if you remain in the home for an extended period. This can significantly reduce the equity available in your home.
- Home Value Fluctuations: If the value of your home decreases, it may impact the amount of equity available or the loan-to-value ratio of the reverse mortgage. This is an important consideration, as it can affect your financial stability in the long run.
- Impact on Inheritance: With a reverse mortgage, the loan must be repaid when you sell the home or pass away. If you plan to leave your home as an inheritance to your loved ones, they may need to sell the property to repay the loan. This can affect the amount of inheritance they receive.
- Complexity and Counseling: Reverse mortgages can be complex financial products. HUD requires borrowers to undergo counseling with an approved counselor before obtaining a reverse mortgage. This counseling aims to ensure that borrowers understand the terms, costs, and obligations associated with the loan.
Alternatives to Consider
Before pursuing a reverse mortgage, it's essential that you explore other options that may better suit your financial needs. These alternatives might include downsizing to a smaller home, considering a home equity loan or line of credit, or accessing other retirement income sources.
Thank you so much for watching. Make sure to like, subscribe, comment and share this video. I'm publishing videos on a regular basis to show you how you too can make smart financial decisions, by saving and making more money so you can feel secure about your retirement.
Remember, obtaining a reverse mortgage is a significant financial decision, and it's crucial to carefully evaluate your circumstances, consult with professionals, and thoroughly understand the terms and implications before you proceed.
Remember also to educate yourself on all things, you’re worth it!