When planning for retirement, various options are available to supplement your income. One of these options is a reverse mortgage, which allows homeowners to borrow against the equity in their homes. While this may seem appealing, it is essential to fully understand what a reverse mortgage entails before deciding if it is right for you. This guide will explore a reverse mortgage, how it works, and what factors to consider before applying.
What is a Reverse Mortgage?
A reverse mortgage is a loan that enables homeowners aged 62 or older to convert a portion of their home equity into cash. Unlike a traditional mortgage, where the borrower makes monthly payments to the lender, with a reverse mortgage, the lender makes payments to the borrower. The loan is repaid when the borrower dies, sells the home, or permanently moves out.
How does a Reverse Mortgage work?
The borrower can receive the loan funds as a lump sum, a line of credit, or regular payments. The home’s value determines the amount of the loan, the borrower’s age, and current interest rates. As the borrower receives payments from the lender, the interest on the loan accrues and is added to the loan balance. This means that the amount owed to the lender increases over time. However, the borrower is not required to make any payments on the loan while they still live in the home.
What are the types of Reverse Mortgages?
There are three types of reverse mortgages: single-purpose reverse mortgages, proprietary reverse mortgages, and federally-insured Home Equity Conversion Mortgages (HECMs). Some state and local government agencies and nonprofit organizations offer single-purpose reverse mortgages that can only be used for one specific purpose, such as home repairs. Proprietary reverse mortgages are private loans backed by the companies developing them. Finally, HECMs are insured by the Federal Housing Administration (FHA) and are the most common type of reverse mortgage.
Factors to Consider Before Applying for a Reverse Mortgage
While a reverse mortgage can provide financial relief for retirees, it is essential to consider all potential drawbacks and implications before applying for one. Here are some factors to keep in mind:
Reverse mortgages can be expensive. The fees associated with a reverse mortgage can include an origination fee, mortgage insurance premiums, appraisal fees, and closing costs. These costs can add up quickly and reduce the amount of money the borrower will receive.
To be eligible for a reverse mortgage, the borrower must be at least 62 years old and own their home outright or have a low mortgage balance that can be paid off with the proceeds from the reverse mortgage. The home must also be the borrower’s primary residence.
Impact on Heirs
The reverse mortgage loan must be repaid when the borrower dies or sells the home. This can be done by selling the home or using other assets. However, if the loan balance exceeds the home’s value, the borrower’s heirs may be responsible for paying the difference. Therefore, considering the potential impact on heirs before taking out a reverse mortgage is essential.
A reverse mortgage can provide financial relief for retirees who own their homes and need additional income. However, it is essential to fully understand the implications and costs of a reverse mortgage before applying for one. Then, considering the factors in this guide, you can decide whether a reverse mortgage is right.
Frequently Asked Questions
What is the downside to a reverse mortgage?
Cons: The downsides of a reverse mortgage A big downside to reverse mortgages is the loss of home equity. Because you’re not paying down your reverse mortgage balance, you’ll make less profit when you sell or limit your borrowing power if you need a new loan. In addition, you’ll pay high upfront fees.
How much money do you get from a reverse mortgage?
The money you can receive from a reverse mortgage generally ranges from 40-60% of your home’s appraised value. The older you are, the more you can receive, as loan amounts are based primarily on your life expectancy and current interest rates.
Is it hard to sell a house that has a reverse mortgage?
Yes, you can sell a house with a reverse mortgage. Your lender cannot force you to sell the home, but you can sell it at any time if you choose to do so. However, remember that when you sell the home, your reverse mortgage comes due — and you’ll need to pay off the loan balance, plus interest and fees.
Who benefits most from a reverse mortgage?
Reverse mortgages are ideal for retirees who don’t have a lot of cash savings or investments but have a lot of wealth built up in their homes. A reverse mortgage allows you to turn an otherwise illiquid asset into cash that you can use to cover expenses in retirement.
Is a reverse mortgage a good idea for seniors?
Income from reverse mortgages typically doesn’t affect a senior’s social security or Medicare eligibility and can be used as the senior desires. In addition, these benefits can take the financial burden off of a family and enable a senior’s estate to pay for long-term care or living expenses when other means are unavailable.
What does AARP think of reverse mortgages?
Does AARP recommend reverse mortgages? AARP does not recommend for or against reverse mortgages. They do, however, recommend that borrowers take the time to become educated so that borrowers are doing what is suitable for their circumstances.