When used correctly, a reverse mortgage can add stability to your retirement years. But as with any financial product, it is not always the best program for everyone.
We have created our “Reverse Mortgage Pros and Cons” guide to help you make an informed decision about reverse mortgages and if the program is suitable for your long-term retirement goals.
If you have a questions about whether a reverse mortgage is right for you, Ask ARLO, or discuss your situation with an independent housing counselor.
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.
Remember, you and the lender still want to be sure you can maintain future property charges such as taxes and insurance.
Use Funds for Virtually Anything
Take your funds in a single lump sum payment, flexible line of credit, or monthly payments for term or 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 whatsoever.
It’s your home, your money, your choice!
Guaranteed Line of Credit
As long as you have funds left on your line of credit and you meet your obligations, HUD ensures your funds are available.
Banks have been known to freeze or eliminate HELOC lines of credit without advance notice in the past.
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 can never owe more than the property is worth.
Home Purchase Feature
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 or did not have 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 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.
Those who need to move to be closer to support systems can do so with a reverse mortgage.
A move might have been out of the question with a forward mortgage, whereas with a reverse mortgage, seniors can move to cities closer to needed services, family or friends.
Reverse Mortgages Can Have Higher Closing Costs vs Traditional Loans
Reverse mortgages can be expensive loans due to upfront financed closing costs.
With the government insured reverse mortgage (HUD HECM) borrowers have both upfront and annual renewal mortgage insurance premiums (MIP) to pay.
Even though not paid out of pocket, the costs can be substantial.
The insurance insure borrowers and lenders against the risk of default but 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 $765,650 receive no additional benefit for any additional value above that lending limit.
Therefore, those owning these higher priced homes may prefer a private or proprietary reverse mortgage.
These loans are called jumbo reverse mortgages due to them 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.
May Impact Needs Based Programs
Another possible drawback to a 62 or older borrower with a reverse mortgage is if they draw from their loan and then allow their liquid balances to be too high to quality for needs-based programs such as Medicaid.
(Note: Regular Social Security and Medicare are not affected by taking a reverse mortgage.)
Beware of Bad Actors
Trusting seniors are targets for people looking to use them for bad investments, family 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.
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 too can live in the home for life as well.
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 do have to remember 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.
How much do you get from a reverse mortgage?
A 62-year-old will typically get about 50% of the homes appraised value as a single lump sum disbursement, line of credit, monthly payments or a combination of all.
Typically, the older you are the more money you will receive as principal limits are created based on actuarial tables.
Other factors include the current interest rate environment and development of 2020 proprietary & jumbo reverse mortgage programs.
Who qualifies for a reverse mortgage?
Anyone age 62 or older with enough equity in their home will qualify for a reverse mortgage loan.
How much you may qualify for depends on several factors including your actual age, current interest rates and your homes appraised value.
Are there any income requirements for a reverse mortgage?
Where there is no specific debt to income ratios, lenders do require that you meet a minimum residual income factor that demonstrates your ability to maintain future property charges such as taxes and ongoing homeowners’ insurance.
Acceptable income types are social security income, pension income etc.
Is there a minimum credit score needed for a reverse mortgage?
Where there is no minimum credit score, lenders are required by HUD to look at your overall credit and payment history.
Specifically, lenders look at the last 24-month history of your property charges and credit history.
If you fail to meet those credit requirements lenders may still approve your loan subject to a LESA – tax and insurance set aside.
Is a reverse mortgage ever a good idea?
Reverse mortgages art inherently good or bad. Like any financial instrument, there is never a single program that suits all needs.
If your desire is to stay in your home and a reverse mortgage loan allows you to live more comfortably it can be a great idea!
For those who have short-term needs or have no desire to stay in their homes indefinitely, you might be better suited for another equity loan or downsizing.
At All Reverse Mortgage Inc., we advise that you always seek the counsel of a trusted advisor and make an informed decision based on what’s best for you and your long-term goals.
How do you pay back a reverse mortgage?
A reverse mortgage can be repaid at any time without penalty.
The servicing company sends the monthly statement to your home which outlines all interest charges and current loan balance. at any time, you are welcome to repay interest only or principal and interest.
However, unlike other mortgages you can also defer all interest due until you pass away or sell your home.
Any remaining equity belongs to your heirs and estate. Should there be any shortfall reverse mortgages are non-recourse in nature and debt cannot be transferred to your heirs or estate.
- No monthly mortgage payments for as long as you live in the home and maintain your property taxes and homeowner’s insurance
- Available funds in Line of Credit grow in availability over time
- Loan is Non-Recourse (Can never be made to pay more than the value of the property at maturity)
- Does not affect Social Security Benefits
- Multiple ways to receive loan proceeds (Monthly Payments, Line of Credit, Lump Sum, etc.)
- Higher costs compared to traditional loans
- Property must remain your primary residence, so you cannot move out without satisfying the loan
- Loan is not assumable by a family member and is due upon the passing or permanent relocation of the last surviving borrower or eligible non-borrowing spouse (Most common complaint by heirs)
- Can affect needs-based programs such as Medicaid & SSI
What are the pros 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 cons 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 reverse mortgage. A reverse mortgage loan cannot be assumed by your heir and becomes 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 good credit to get a reverse mortgage?
Not necessarily. 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 decided 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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