Is a Reverse Mortgage Right for You? Four Questions to Help You Decide
Reverse mortgages are a way for seniors to tap into their home’s equity to help fund expenses in retirement. A reverse mortgage provides cash you may need now after first paying off your remaining mortgage.
This is possible because, unlike a conventional mortgage — where you receive the loan amount upfront and pay down the loan over time — a reverse mortgage allows you to increase the loan balance over time as you receive monthly payments or a lump sum (the loan balance increases due to the accumulation of interest; the amount available to the homeowner does not increase). Reverse mortgages may be appropriate for your situation, but it’s important to weigh the pros and cons of a reverse mortgage. Here are some questions to ask to help you decide.
How much can I get with a reverse mortgage?
For this article, we’re discussing reverse mortgages insured by the Federal Housing Administration. Reverse mortgages are also called home equity conversion mortgages — HECM for short — and are by far the most common type of reverse mortgages. To qualify for an HECM reverse mortgage:
- One homeowner must be at least 62 years old. If the spouse is younger, they can be listed as a non-borrowing spouse on the application, according to the Department of Housing and Urban Development (HUD)1; this grants them some of the protection of the reverse mortgage should the borrowing spouse pass away.
- The home needs to be the primary residence.
- You must have a remaining mortgage balance that meets the reverse mortgage lender’s minimum, according to LendingTree.2
Several factors go into determining how much you can receive with a reverse mortgage.3 These include:
- The home’s current appraised value
- How much you owe on your mortgage
- Age of the youngest homeowner
- Costs of obtaining a reverse mortgage
The amount of your reverse mortgage can vary widely. In general, your potential lump sum payment goes up 1) the older you are; 2) the higher your home value; and 3) the lower your mortgage balance. You’ll need to have at least 50 percent equity in your home, because the reverse mortgage will first pay off the remaining balance on your existing mortgage.
Mutual of Omaha’s reverse mortgage calculator can provide a starting point for understanding how much you might receive.
How long do I plan to stay in the home?
Reverse mortgages are available only for your primary residence. You continue to own the home, while the issuer has a lien against your property. If you decide to change primary residences permanently, however, you’ll need to pay back the loan’s balance.
All HECMs are non-recourse loans, according to HUD.4 “This means that the HECM borrower (or his or her estate) will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt,” HUD says. But you’ll need to consider the various fees and closing costs required to obtain a reverse mortgage, which often are higher than for a conventional mortgage. These costs include lender fees, closing costs and upfront mortgage insurance.
So if you’re only planning to stay in the house for a few years, you’ll need to determine whether the total cost of obtaining a reverse mortgage is worth the advantages it can offer. It might make more financial sense in your case to wait and simply sell your home when you’re ready to move.
Can I afford to pay taxes and other ongoing costs of homeownership?
Reverse mortgages allow you to tap into your home’s equity and eliminate a monthly mortgage payment, but you remain responsible for important ongoing costs. These include property taxes, homeowner’s insurance, any homeowner’s association fees, and home repair or maintenance costs.
You can use regular payments from your reverse mortgage to pay these costs. But if you’re unable to pay the taxes and insurance, you might be subject to reverse mortgage foreclosure.
During the application process, the lender conducts a financial assessment that includes an analysis of your credit history. Based on this assessment, the lender might need to set aside some of the money you’d receive; this fund, which will go toward paying for ongoing taxes and insurance, is called a lifetime expectancy set-aside.
Do I plan to leave the home to anyone after I die?
The reverse mortgage issuer doesn’t automatically claim the home when you die. You can leave the home to your heirs, but if you do so, you’ll need to consider how the reverse mortgage will be paid off. Your reverse loan balance increases over time, as the interest on your loan and fees accumulate. Since you’re using home equity, this decreases the assets you have available to leave to your heirs.
Borrowers or their heirs typically pay off reverse mortgages by selling the home; they keep whatever is left after repaying the loan. Among the options, your heirs can keep the home by paying off the reverse mortgage or by taking out a new mortgage on the home to cover the balance of the reverse mortgage.
You’ll also need to consider who else is living in the home. If you’re married and jointly own the home, and are both eligible for a reverse mortgage, you and your spouse can both be on the reverse mortgage. In this case, if one spouse dies, the surviving spouse becomes the homeowner with the reverse mortgage. But a spouse who is not a co-borrower on the reverse mortgage, as well as anyone else living in the house, may face relocation if the reverse mortgage owner dies.
Reverse mortgages were designed with retirees in mind, but they aren’t the right solution for every homeowner. After asking yourself the four questions we’ve posed here, you should meet with an approved provider to see whether a reverse mortgage is right for you.
DISCLOSURES
1 Source: https://www.hud.gov/program_offices/housing/sfh/hecm/surviving_non_borrowing_spouse
2 Source: https://www.lendingtree.com/home/reverse-mortgage/much-equity-need-reverse-mortgage/
3 Source: https://www.hud.gov/answers
4 Source: https://www.hud.gov/sites/documents/42351C1HSGH.PDF
Mutual of Omaha Mortgage, NMLS ID 1025894. 3131 Camino Del Rio N Suite 1100, San Diego, CA 92108.
Charges such as an origination fee, mortgage insurance premiums, closing costs and/or servicing fees may be assessed and will be added to the loan balance. As long as you comply with the terms of the loan, you retain title until you sell or transfer the property, and, therefore, you are responsible for paying property taxes, insurance and maintenance. Failing to pay these amounts may cause the loan to become immediately due and/or subject the property to a tax lien, other encumbrance or foreclosure. The loan balance grows over time, and interest is added to that balance. Interest on a reverse mortgage is not deductible from your income tax until you repay all or part of the interest on the loan. Although the loan is non-recourse, at the maturity of the loan, the lender will have a claim against your property and you or your heirs may need to sell the property in order to repay the loan, or use other assets to repay the loan in order to retain the property.
These materials are not from HUD or FHA and the document was not approved by HUD, FHA or any Government Agency.
Subject to Credit Approval. www.nmlsconsumeraccess.org
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