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“I can almost hear it now, “This is an article written by a guy who does reverse mortgages, There probably won’t be any con’s”! As passionate as we are about the reverse mortgage product, there are some drawbacks in some instances and we make certain that we point out the pro’s and con’s to all reverse mortgage applicants. As great as this product is, it is not right for everyone and it is always the best idea to know your goals and to have the help and support of your family and a trusted financial advisor.
In this case, let’s start with the con’s. Reverse mortgages can be expensive loans. In the past, borrowers almost always had to pay not only an origination fee but also the HUD Up-Front Mortgage Insurance, and those initial costs can be staggering to some.
Also, there are many ways to take your funds with a reverse mortgage and since the loan balance grows over time, the fees are based on the principal lending limit or the property appraised value, whichever is less. However, one of the good things is that with the recent HUD changes to the program, if you are not taking 60% or more of your total Principal Limit at the initial closing or in the first 12 months, the Initial Mortgage Insurance Premium (IMIP) cost as come down considerably.
If however, you are paying off an existing loan or have other liens that you must pay off (HUD now calls this your “mandatory obligations) that will make your starting loan balance 60% or more of the total Principal Limit or benefit amount available to you for your age, property value, etc., then your IMIP can still be a substantial sum.
Borrowers do not have to pay this money out of pocket up front, but it is added to the loan balance and so if the borrower is not looking for a long term solution, a reverse mortgage is probably the last loan that should be considered when the costs are higher. Another possible negative of a reverse mortgage is for seniors who are not paying off a current mortgage but take enough of their funds up front for various purposes that might affect other eligibility that they currently receive.
Seniors need to concern themselves with eligibility requirements for some need-based programs such as Medicaid and what the effect of having additional money in their accounts would have on their eligibility. Unlike the old program parameters that would allow borrowers to take a lump sum of all funds up to the full benefit amount or Principal Limit at closing even if there were no liens to pay off, the new program limits the amount that borrowers can take at closing or in the first 12 months based on their mandatory obligations.
However, borrowers still need to be judicious about not taking too much money as the interest on their loan accrues faster than interest will accrue in a bank account at the low rates that borrowers earn on savings.
Something also to watch is that there are always unscrupulous folks looking for a way to separate seniors from their money. Whether it be with a bad investment (and bad can be defined as risky or one that cannot be accessed for long periods of time without penalty which the senior borrower may not have) or just someone looking to steal from the senior, having a lot of cash is a tempting target and many seniors are too trusting.
Too often we see that borrowers have been convinced that a “sure fire” investment in a family members’ business turned out to be a lot less sure fire than they thought and it was not the loan’s fault that the money was lost, but the horror stories still refer to the borrower who lost all their money after taking out a reverse mortgage.
HUD eliminated the temptation to remove a younger spouse from title in August of 2014 to obtain more money on a reverse mortgage when they implemented guidelines that now require the age of a younger spouse to always be considered when granting a reverse mortgage.
Previously, if the older spouse was the only one on the loan and then had to leave the property due to moving to a care facility or passing, then the loan would be called due and payable and the younger spouse often had to leave the property at a very difficult time in their life. Now younger spouses who are not 62 have a deferral period for as long as they live in the home even after the passing of the older spouse and as such are protected (but the original amounts that these borrowers receive on the loans are also lower taking into consideration the ages of the younger spouses).
One thing that borrowers need to be aware of is that the borrower is still responsible for the payment of the taxes, insurance and for the upkeep of the home. If the reverse mortgage will only pay off an existing lien, but the borrowers’ means will not maintain the property and the borrowers’ necessary lifestyle, the reverse mortgage is not a good long-term solution.
No one wants to think about selling their home and downsizing when they love their current home, but if you realistically will not be able to pay for all your needs, keep your taxes, insurance and maintenance on the home current and still put some money away for later, then a reverse mortgage that only pays off the loan on your current home is probably not the answer.
There comes a time when you have to ask yourself if you are just delaying an inevitable time when you will not be able to pay taxes or other expenses and it that is so, then there may be other options with a purchase reverse mortgage that I will discuss later and the time to consider them is before you have no alternatives.
Now the pro’s!
A reverse mortgage allows senior borrowers to live for the rest of their lives in a home with no monthly mortgage payments (keep in mind the debt is repaid when you leave the home). The home can be financed or owned free and clear and the borrowers can still obtain a reverse mortgage.
There are no income or credit requirements to meet. Unlike conventional forward mortgages, borrowers do not have to make monthly payments so they do not have to qualify like forward mortgage borrowers.
Borrowers always own their home and borrowers or their heirs dispose of their property just the same with a reverse mortgage as they would with any other home loan. Reverse mortgage proceeds are tax free, and borrowers can use the money for any purpose they choose. Borrowers can modernize or alter their home for comfort. They can pay for needed medical expenses, travel or other recreation; they can use the money for grand children’s college. It’s your home, your money and your choice!
Since there’s no monthly mortgage payment so as long as the senior homeowners lives in the property, they never have to worry about where they will get the money to make the payments. The loans are government insured and therefore, the senior homeowners are guaranteed to always have the funds available to them, and if the lender does not pay funds to the homeowners in a timely manner, the bank owes the homeowners a late charge!
HUD guarantees that as long as you have funds left in your line of credit, you will always have them available. That is very comforting when banks have frozen lines of credit, eliminating the ability for borrowers to draw on them just when they needed to or have eliminated the loan entirely on normal Home Equity Lines of Credit.
And finally, no matter how long you live in your home, and no matter how much money you take from it in payments or what the real estate values do, you and your heirs can never owe more than the property is worth and your heirs can choose to pay the loan off at 95% of the current value if that is less than the amount owed if they wish to keep the home. Many homeowners today are still upside down on values, although thankfully the recent increases in value have started to eliminate that problem.
Regardless of what happens to values in the future, this can never happen with the HUD Home Equity Conversion Mortgage…otherwise known as the government reverse mortgage even if values drop again.
Finally, you can use a reverse mortgage to purchase a home as well as refinance the home you are in. This has proved an invaluable option for borrowers for a few reasons. Whether you need to move to lower your costs of living (as we discussed above), you need to find a home that better suits your needs later in life (single story, smaller, nearer to family or needed services, etc) or you just want to move because you no longer find that your current house best suits your lifestyle, the ability to use a reverse mortgage to purchase your next home is a fantastic took for borrowers over the age of 62.
This demographic of home buyer typically had to pay cash for a new home in the past because income may not support house payments and traditional loans may not be available. Borrowers who did not have the ability to pay cash, or did not want to use all the money they had coming from the sale of their existing home just to purchase the next home can now buy their new home using about half of the purchase price as the down payment and also never having to make a mortgage payment. This works extremely well for people who want to buy a home, those who need to get a home that will better suit their needs and those who need to lower their expenses as well.
We have seen reverse mortgages do some great things for some people who really wanted and needed them, but only you in conjunction with your trusted financial advisor and family can tell if this is the right loan for you. Between the refinance and the purchase options, borrowers age 62 and over have more choices than ever before so maybe a reverse mortgage is worth a second look for your circumstances.
“Reverse Mortgage Pros and Cons” by www.reverse.mortgage
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Like this article? Here are a few more articles we think you’ll find helpful:
- Accurate, Up to Date, Reverse Mortgage Information
- How Does a Reverse Mortgage Work? The Complete Answer.
- Is a Reverse Mortgage Right for Me?… Let’s Weight the Pros and Cons
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