Reverse Mortgages: Are they for you?

If you are retired or on a fixed income you may be considering using a reverse mortgage to access the equity in your home to help cover day to day expenses, fund a renovation or even pay for travel. While reverse mortgages can be an excellent tool in some situations, they are not for everyone. Here is a quick overview of what you need to know about reverse mortgages.

What is a Reverse Mortgage?

A reverse mortgage lets a homeowner convert some of the equity in their home into cash without actually selling the house. It is basically a loan against your home that you are not required to pay back as long as you stay in your house. However, many senior citizens have been charged excessive up-front fees so understanding these types of loans is key to making sure you are getting the best deal possible. 

The Better Business Bureau (BBB) recommends that all homeowners reseaching a reverse mortgage should consider all factors as well as learn about a number of free resources that are available to help them make an informed decision. 

What Are The Basics of a Reverse Mortgage?

Here are the basic requirements of a reverse mortgage:

All owners of the home must be at least 62 years of age. You must have equity in the home and all parties on the title of the home must sign the reverse mortgage paperwork. 

The home must be a primary residence; you cannot take a reverse mortgage on a vacation home. The home must be in good condition and you are required to maintain the home throughout the reverse mortgage.

You are still responsible for property taxes, any necessary repairs as well as insurance. If you fail to keep the home insured, and properly maintained, the lender can call in the loan and you will have to repay it in full. 

A reverse mortgage cannot be initiated until the homeowner receives counseling from a Home Equity Conversion Mortgages (HECM) counselor.

Reverse Mortgage Tips From the BBB

Reverse mortgages can be complicated and can have plenty of unforeseen consequences so it is important to full understand the legally binding contract you are signing. Here are a few tips from the BBB in regards to reverse mortgages. 

Consult a HECM Counselor: This is an absolute necessity and a requirement. They can help answer questions about your eligibility, the financial implications it can have for you as well as other alternatives that may be available to you. 

You should be aware that the Fair Housing Administration (FHA) recommends avoiding any reverse mortgage service that charges a fee for referring a homeowner to a reverse mortgage lender. The FHA provides all the information you will need free of charge and counselors are available for free or a small fee. You can find a list of approved counseling agencies by calling 800-569-4287 or visit the HUD website at www.hud.gov.

Consider Any Heirs: A reverse mortgage must be repaid with the proceeds of your estate so if your heirs are assuming they will inherit your home or other proceeds, you should notify them and include them in the decision making process. This will ensure that everyone is on the same and there is no family discord regarding the reverse mortgage loan. 

Be Sure It Meets Your Needs: It is important to consider all factors with a reverse mortgage and make sure it meets all of your current and future needs. The amount you can borrow will depend on your age, location and value of your home as well as the cost of the loan. 

Will the amount you can borrow cover your expenses, if not a reverse mortgage many not be appropriate. In most cases, you will need to stay in your home for at least 5-10 years for the loan to make financial sense, does this fit into your plan? Will your home meet your future needs as you age and may experience mobility issues.

If you feel you may need to move to an assisted living or nursing home in the near future you may wan to reconsider a reverse mortgage, if you move from your home the loan comes due immediately. 

The Amount You Owe Increases: Interest is added to the balance each month which means that the amount you owe grows over the lifetime of the loan so the longer you stay in the home, the more money will have to be repaid when you leave the home or pass away. It should be noted that you will never owe more than you home’s value. 

Factor in All Costs: Like all loans, there will be fees with a reverse mortgage and you will need to cover some of those expenses. Always questions any fees and make sure you fully understand your costs for the loan. Expect fees such as origination fee, closing costs, a mortgage insurance premium, a servicing fee and the interest rate.

Completely Understand Repayment Terms: This is key to making sure a reverse mortgage is a successful strategy. Always ask questions if you are unsure of the terms and make sure you completely understand you obligation regarding repayment. 

A reverse mortgage must be repaid whenever the homeowner sells the home or dies. In addition, if the homeowner lets the insurance coverage lapses, fails to pay property taxes or allows the property to deteriorate by not maintaining it, the lender can require full repayment of the loan. If the borrower fails to live in the home for 12 consecutive months the loan can also be called in. 

Reverse mortgages can be a good idea for many homeowners but it is important that you understand what you are getting into and your obligations under the loan. As with all insurance or financial products ask questions about anything you don’t understand and make sure you have a complete understanding of the product before signing on the dotted line.