A reverse mortgage refers to a type of loan for homeowners who are at least 62 years old. It allows a homeowner to convert part of the equity of their homes into cash. If appropriately used, reverse mortgages ensure a comfortable and independent financial life, especially if you are a retired parent or grandparent.
Here are some reverse mortgage facts you need to know before taking up this type of mortgage.
1. It Can Be a Risky Venture
In case one dies after signing up, a reverse mortgage may have serious repercussions on your surviving spouse or any other family member residing in your house. They may be forced to move out, leaving them without a roof over their heads. It is no wonder that the Consumer Financial Protection Bureau has received over 1200 reverse mortgage complaints since 2011 December.
Taking up a reverse mortgage puts your biggest asset, your home, at high risk. If you decide to sell your home, the loan balance, interests and all accrued fees are deducted from the sale proceeds. You may also be putting your financial security at risk by taking up a reverse mortgage.
2. There Have Been Attempts by the Government to Make It Safer
The most popular reverse mortgage is the Home Equity Conversion Mortgage, which is orchestrated by HUD and FHA. By 2015, for one to qualify, a borrower had to pass a financial assessment. Although lenders demand access to your credit history and income streams, they are also required to set some money aside for taxes, homeowners insurance, or maintenance in case a borrower is not able to afford them.
Besides, with the new HUD and FHA guidelines, your loved is ensured of uninterrupted reverse mortgage distribution regardless of whether or not their name is on the borrower loan. This was not the case before 2014.
3. You May Receive a One-Time Lump Sum to Cover Large Unexpected Costs
With a reverse mortgage, you can live off the money, settle medical bills or pay off your mortgage to increase cash flow. You will, however, be required to pay property taxes, home maintenance costs, and homeowners insurance. If yours is a fixed rate loan, you have no other option, unlike in an adjustable rate loan, which allows you to receive your proceeds.
4. The Monthly Payments Supplement Your Income
One of the problems retirees face is the lack of a stable monthly income. Those signing up for a reverse mortgage could use it to bridge their retirement income gap. It is possible the distributions generate thousands of dollars each month to cover expenses, depending on the borrower’s age and the value of the home.
5. Proceeds from Reverse Mortgage Are Tax Exempt
Since a reverse mortgage is considered an advance and not an income, according to the IRS website, these loans are not taxable. You should, however, consult a tax professional to be sure. The proceeds do not affect your social security or medical benefits. On the flip side, however, all accrued interests on your reverse mortgage are not deductible until you pay it, usually when you pay off the loan in full.
6. You Can Buy a Home with a Reverse Mortgage
Since those eligible for this loan are seniors, they often want to downsize their homes going into retirement. Previously, retirees relied on the ‘three-legged stool’; that is, pension, social security, and personal savings, to cater for their expenses. The reverse mortgage is a cost-effective method retirees use to either find a more suitable home or relocate to a friendlier environment.
7. HECM Loans Are Prohibitive
Lender fees for reverse mortgage loans can be over $10,000 in addition to the third-party fees for home appraisals. The costs are rolled into the loan balance to preserve the borrower’s cash. As a borrower, you shop for the best deal you can get since, in the long run, the loan costs will ultimately attract interest.
8. There Are Limits to How Much of Your Equity You Can Access, and How Quickly You Can Use It
The HECM has put in place a ‘principal limit’ as a safety measure. The borrower can only borrow part of their home equity while the rest is left to cover interests. The equity limit is calculated on the basis of the age of the youngest borrower and the total home value.
9. Reverse Mortgages Have Adjustable Interests Rates
Borrowers opting to receive monthly payment distributions are required to have adjustable interest rates on their loans, which are tied to the more volatile short-term indexes. The adjustable rates offer more flexibility for home equity access.
10. You Might End Up with Less Equity
Since no loan payment is made until you sell your home, the debt balance increases every month, and so does the interest on the debt. There is a possibility you will outlive your equity if the interest rates drastically climb. When the home sells, the entire proceeds go to the lender to settle the debt, leaving heirs with no cash at the close of the sale.
Just like any other type of loan, you will need to consider all the benefits and risks involved in a reverse mortgage before taking it up.
