When used correctly, a reverse mortgage, also known as the Home Equity Conversion Mortgage (HECM), can add stability to your retirement years. However, as with any financial product, it is not always the best program for everyone.
We published this to guide you in making an informed decision about reverse mortgages and assist you in determining if this program is suitable for your long-term retirement goals.
#1. Pro: There are no monthly mortgage payments
A reverse mortgage allows eligible borrowers to live the rest of their life in their home with no monthly mortgage payments.
Not nearly as much income is needed to qualify for a reverse mortgage as compared to a traditional forward loan.
Remember, you and the lender still want to be sure you can maintain future property charges such as taxes and insurance.
#2. Pro: You can use funds for virtually anything
Take your funds in a single lump sum payment, flexible line of credit, monthly payments for term or for life, or a combination of these options (i.e., a line of credit to use for home improvements but also a monthly payment for life).
Reverse mortgage proceeds are loan funds, therefore they are treated like any other loans and not considered income (check with your tax advisor).
You can use the money for any purpose or need you may have.
– Use ARLO’s Calculator to get an estimate of your available loan.
#3. Pro: Guaranteed line of credit for life
As long as you have funds left on your line of credit and you meet your obligations, HUD ensures your funds are always available.
Banks have been known to freeze or eliminate HELOC lines of credit without advance notice in the past.
They also come to the end of the “draw period” at which time you enter a repayment phase where funds are no longer available, and payments can double or triple when your income may not be as high as when you received your loan.
It is comforting to know this cannot happen with the reverse mortgage line of credit.
No matter how long you live in your home, no matter how many payments you take or what happens to the real estate values, you and your heirs will never be required to pay back more than the property’s value to repay the loan in full.
#4. Pro: Ability to purchase a new home
You can use a reverse mortgage to not only refinance your existing mortgage, but also to purchase a new home.
This works extremely well for those who:
- Want to buy a home.
- Need to get a home that will better suit their needs.
- Need to lower their expenses.
In the past, seniors purchasing homes were often forced to pay cash for a new home due to their income scenario.
Borrowers who did not have the ability to pay cash, did not have cash, or want to use all cash from the sale of their existing home, can now buy their new home using the reverse mortgage without ever having to make a monthly mortgage payment.
This loan works great for seniors seeking homes they may not have been able to consider otherwise.
New homes in 55+ developments where prices might have kept them from the home of their dreams if they had to pay 100% cash, are now attainable.
A move that may have been out of the question with a traditional loan, like for those who need to move closer to support systems like needed services, family and friends, can do so with a reverse mortgage.
#1 Con: Reverse mortgages can have higher closing costs vs traditional mortgages
Reverse mortgages can be expensive loans due to upfront financed origination fees.
With the government insured reverse mortgage (HUD HECM) borrowers have both 2% upfront and .50% annual renewal mortgage insurance premiums (MIP) to pay.
Even though not paid out of pocket, the costs can be a substantial drawback for those sensitive to closing costs.
Many times, borrowers are able to receive lender credits to pay for a portion or a substantial portion of their costs, but this is not always the case.
You should always shop around to find the best deal available at the time.
The insurance insures borrowers and lenders against the risk of default but it also ensures that borrowers and their heirs will never have to repay the loan for more than the property is worth, regardless of how high the balance increases or if future property values fall.
Borrowers with homes worth more than the HUD maximum Lending Limit of $822,375 receive no additional benefit for any additional value above that lending limit.
Loan amounts are determined as a percentage of the appraised value or the HUD lending limit, whichever is less, so values higher than the maximum lending limit bring borrowers no additional funds under the HUD program.
Therefore, those owning these higher priced homes may prefer a private or proprietary reverse mortgage.
These loans are called jumbo reverse mortgages due to being used primarily for higher valued properties.
Because these loans are not government insured, they require no mortgage insurance, but the interest rates are higher.
#2 Con: May impact needs based programs
Another possible drawback to a 62 or older borrower with a reverse mortgage can be the accumulation of funds in their account if they rely on needs-based programs such as Medical.
Reverse mortgage proceeds are not income, but if borrowers draw funds and allow them to accumulate in their checking/savings accounts, they may nullify their qualification.
Special care must be taken to only draw funds as needed and then be certain they are gone from the borrowers’ accounts prior to month-end when borrowers must supply statements to various entities to receive ongoing benefits.
(Note: Regular Social Security and Medicare are not affected by taking a reverse mortgage.)
#3 Con: Bad actors
Trusting seniors are targets for people looking to use them for bad investments, families with failing businesses, unscrupulous caretakers and others looking to take advantage. Too often when we see reverse mortgage funds lost, it was not the reverse mortgage that failed but the way the money was spent/invested.
#4 Con: Older versions lacked spousal protection
Fortunately, HUD changed its guidelines and unlike loans closed prior to 2015, spouses of reverse mortgage borrowers who are under 62 years of age at the time the loan closes are now protected as an “eligible non-borrowing spouse.”
They must also maintain the home in a reasonable manner, pay the property taxes and insurance on time, and live in the home as their primary residence.
Borrowers and spouses must keep in mind that eligible, non-borrowing spouses, are not borrowers on the loan, and as such, they do not have access to any line of credit funds that may still be available after the eligible borrower passes.
It is also important to note that non-borrowing spouses are protected in the event of the death of the borrowing spouse.
The loan may still be called due and payable if the borrowing spouse should leave the home for any other reason, so borrowers need to consider this when making their plans and decisions about a reverse mortgage with a spouse who is not yet 62 years of age.
Reverse Mortgage vs Traditional Loans
Reverse Traditional HELOC
Allows No Monthly Payments ✅ ❌ ❌
Line of Credit Growth? (Available funds in Line of Credit grow in availability over time.) ✅ ❌ ❌
Limited Credit Qualifications ✅ ❌ ❌
Limited Income Qualifications ✅ ❌ ❌
Flexible Proceeds? (Monthly Payments, Line of Credit, Lump Sum, etc.) ✅ ❌ ❌
Investment Properties (Reverse Mortgages & HELOC must remain your primary residence.) ❌ ✅ ❌
Low Closing Cost Options ❌ ✅ ✅
Assumable? ❌ ✅ ✅
What are the benefits of a reverse mortgage?
With a reverse mortgage you do not have to make any monthly mortgage payments. One of the ways to access the funds is through a line of credit that grows in availability over time. A reverse mortgage loan is a non-recourse loan which means you cannot owe more than the value of the property no matter how long you have the loan in place. Your social security is unaffected by obtaining a reverse mortgage.
What are the detriments of a reverse mortgage?
A reverse mortgage will have higher closing costs to obtain than a traditional loan. The property must be your primary residence so you cannot move out or rent the property unless you pay off the loan. A reverse mortgage loan cannot be assumed by your heir and will become due and payable upon the passing of the last surviving borrower or when the property is no longer occupied.
Having a reverse mortgage can impact your ability to qualify for or keep certain needs-based products like Medicaid and SSI. With no mortgage payments the balance increases over time.
When is a home equity loan better than a reverse mortgage?
A home equity loan is better if you need short-term financing. An example would be if someone were wanting to borrow a small amount of money to fix up or renovate their property in order to sell it. A reverse mortgage is not suited for short-term financing and is designed to provide long-term solutions for remaining in your home.
Does the bank own the house if I get a reverse mortgage?
No. A reverse mortgage is just a loan and therefore you retain ownership of the property upon entering a reverse mortgage agreement.
Do you need a good credit score to get a reverse mortgage?
No. A reverse mortgage loan does have credit guidelines as all loans do and having good credit improves your chances of getting the loan at the best terms. However, even with less than perfect credit a reverse mortgage can still be obtained. The guidelines do permit extenuating circumstances and a Life Expectancy Set Aside in some instances to overcome derogatory credit.
Is a reverse mortgage right for you?
It’s important when planning to think long term.
Retirement is tricky and people are living longer. If you choose a reverse mortgage now and later decide to move, you might have less available equity for your next purchase. If your current home is fully accessible and you can foreseeably stay there for your lifetime, the reverse mortgage can help fund a more secure retirement.
We have seen reverse mortgages do some great things for people who really wanted and needed them. However, only you, in conjunction with your trusted financial advisor and family, can decide if this is the right loan for you!
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