What is a Reverse Mortgage: Is Reverse Mortgage a Good Idea for Senior Citizens

A reverse mortgage is a kind of reverse loan that is given to senior citizens who own homes. Check out reverse mortgage counseling if you are a retiree with limited income in order to know the truth about reverse mortgages and find out whether it is suitable for you.

What is a Reverse Mortgage

According to the National Reverse Mortgage Lenders Association, house owners above 62 were holding around 6.6 trillion dollars in home equity during 2017. It is called reverse mortgage, because in a normal mortgage, the borrower pays monthly amounts to the lender, whereas in this case, the lender pays a monthly amount to the borrower, whereby the borrower is converting their home equity into cash. The borrower continues to have ownership over his home. It was first introduced in 1989 allowing senior citizens to tap a part of home equity without moving from their homes. You are literally living off your home!

Understanding the Basics: Reverse Mortgage Facts

Reverse mortgage is also called HECM or Home Equity Conversion Mortgage.

  • Reverse mortgage loan is meant for senior citizens, homeowners who are 62 years or above, having a mortgage on their homes or a free home.
  • You will first have to discuss your financial position to see if reverse mortgage will suit your purposes.
  • You can then apply for the mortgage and go through counseling with a counselor, to ensure that you are aware of all the financial options before entering into reverse mortgage.
  • Your home will then be appraised for valuation.
  • Your loan will be closed and funds will be disbursed to you.
  • The loan will then be repaid when the borrowers are not living in the house anymore.
  • You can receive the loan in a lump sum or as fixed monthly payments. However, the amount has to be paid if the borrower dies or if he/she moves out of his home or sells his home.

Tip: While availing reverse mortgage loans, apply for Single purpose loans, as they have the lowest costs. However, you can use it only for a particular purpose, say home repairs.

how does reverse mortgage work for seniors

How Does Reverse Home Mortgage Work?

How does a reverse mortgage loan work? There are different types of reverse mortgages that you can avail.

  • HECM is the most popular type and one of the best reverse mortgage types. It is not loaned by the government but the FHA insures the loan.
  • You can also opt for the Proprietary type of loan, where the private mortgage companies insure the loan. They also offer protection to borrowers, similar to the HECM.
  • How does reverse mortgage work for seniors? The lender makes payments to the borrower keeping the home as collateral.
  • Home owners can choose the kind of payments they want and will have to pay interest on the amount received, although the payment is not done upfront.

Tip: The amount to be paid back eventually just keeps growing with time. All interests to be paid are considered part of the loan.

  • The home owner continues to retain the ownership.
  • The amount received is not taxable.
  • The loan amount is calculated based on the home value; the amount you still owe for the home; the person’s age; prevailing interest rates, among other factors.
  • When he dies, the house is sold and the proceeds go to the lender.
  • Heirs can pay off the mortgage loan and continue to keep the home.
  • When there is a surplus above the borrowed amount, the proceeds of the home sale go to the heirs.

Eligibility and Requirements

  • Who qualifies for reverse mortgage loans? The basic requirement is that the youngest of the borrowers must be a senior citizen, at least 62 years.
  • Another of the requirements for a reverse mortgage is that He/she must be living in the home as part of a primary residence.
  • The home equity must be sufficient. If there is a shortfall, the loan will not be able to cover the prevailing mortgages on your home. In this case, you have to pay off the balance and lower it to meet the required amount.
  • Borrowers must also meet all other HUD criteria.

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Are Reverse Mortgages Good or Bad?

An Attractive Proposition

Reverse mortgage sounds like an attractive proposition. You just have to tap into your home equity and do not owe any money to the lender as long as you continue to stay in your home.

Well, that depends on who is taking the reverse mortgage. It makes sense and could be a lifesaver for a person if:

  • He/she has no plans to move from their residence.
  • He/she is able to afford the maintenance costs of the home.
  • He/she would like to get their hands on the home equity in order to supplement incomes or would like to have some extra money on hands for an emergency.
  • He/she might like to pay off some debt or use the money for some unexpected repairs, healthcare issues and so on.
  • It is a flexible loan and seniors can use it for financing anything.
  • You continue to live in your home without making any mortgage payments.
  • The lender cannot take your home for non payment issues, as there is no payment to be made as long as you live.
  • You will be owing only the amount equal to your home value at the time of repayment. It can be an advantage if the home value falls when you die or leave the house. The home value gets locked in at a particular price, so your credit might be more than the value of your home in the distant future if the market value falls.
  • The loan is tax free.
  • You can use it for any purpose, such as payment of children’s education; traveling; buy insurance or just save it.
  • The amount is federally insured, so even if the lender defaults you will get your payment.

are reverse mortgages good or bad

The Other Side of the Coin: Reverse Mortgage Risks/Dangers

  • Even after taking a reverse mortgage, you still have to pay the property taxes; insurance premiums and other home maintenance costs.
  • If you’re unable to make these payments, your home might get foreclosed.
  • You have to pay a lender’s fee along with underwriting fees, appraisal fees, credit checks etc.
  • In order to avail the loan, you must own the home fully.
  • You have to spend the money that you receive or else it could be considered as an asset and this might affect Medicaid payments.
  • If you move out of your house for any purpose, say hospitalization, you might have to repay the amount. (In case of an FHA Federal Housing Administration loan, you can stay a year in a nursing home)
  • There is a loan limit of $679,000 in case of the HECMs so you cannot tap into it for more, even if you have a bigger home equity.

Are reverse mortgages safe(Source: mlsreversemortgage.com)

  • Are reverse mortgages safe? One of the reverse mortgage dangers is that seniors enter the agreement without being aware of all the terms. They are not able to renegotiate later on and feel that the interest on reverse mortgage rates are rather high. Another problem is that it becomes a problem to your heirs, as the loan is due as soon as the person is dead.

Is it Suitable for You?

So how do you know if reverse mortgage is for you or not? Ask yourself the following questions:

  • Will you be able to afford the taxes, the maintenance amounts and the insurance to be paid for your home? If you cannot, you stand the risk of foreclosure of your home.

Tip: A financial assessment is usually done  assessing the homeowner’s ability to make these payments, in order to protect the borrower.

  • Can you make the upfront costs? These include lender fees; counseling session fees; mortgage insurance fees and so on.
  • Do you have any other options for supplementing your income? Do some research. For instance, you can consider some senior discounts; selling unused products from your home or even downsizing by selling your home and moving to a smaller property.
  • How long are you planning to live in the property? These loans are due when you die or when you move out of the property. The longer you stay in the home, the more the benefits you can reap.
  • How will you use the proceeds from the reverse mortgage? If you use it responsibly for paying off debts or use it for emergencies or even purchase a home with reverse mortgage proceeds, it makes sense.

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Wrap Up

As older American citizens are approaching retirement age, they wish to feel secure in their homes and finances. Many of them need supplements to their income. Reverse mortgage is becoming extremely popular among retirees who are looking for extra income. It is available to anyone more than 62 years and has a house with complete ownership or just with a small mortgage balance to be paid. You accumulate a reverse mortgage loan over time and them make the payment back when you die or are not living in your home any longer.  It can offer senior citizens a better lifestyle and greater financial security.

Before opting for reverse mortgage, assess your financial situation. Will the loan solve your income shortage problems or is it just a temporary solution? It is a great source of additional cash flow during your retirement days, but consider the risks and dangers. Do your homework and try to understand all the resources and options at your disposal before you consider reverse mortgage.

Cover Photo by Pixabay

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