A reverse mortgage may be an excellent way for you to benefit from the equity in your home. It is another solution to get money for retirement. However, there are several reverse mortgage disadvantages that you should be aware. You should research every option available before making the decision to get a reverse mortgage.
A reverse mortgage is similar to a regular loan except, instead of you paying back a loan, you are paid the money from the loan based on the equity in your home. The value of your home and how old you are will determine how much money you can get. The older you are, the more money you can obtain from a reverse mortgage.
How Does Reverse Mortgage Work?
In order to get a reverse mortgage, you must be age 62 or over, own your own home, and prove that your home is your principal residence. The lender would then lend money to you based on the equity in your home. You can get money from your reverse mortgage paid to you monthly, in a lump sum, or from a line of credit you can draw from whenever you please. You or your co-signing spouse cannot be forced from the home as long as you both live unless you move from or sell your home.
Reverse loan payments are not taxable. If you must go to a nursing home, the loan does not have to be paid until after 12 consecutive months.
Most states will require that you get reverse mortgage counseling before applying for a reverse mortgage loan. This counseling will ensure that you know every pro and con of getting a reverse mortgage loan. The cost for this counseling is payable by you and will vary from agency to agency.
Reverse Mortgage Disadvantages
Reverse mortgages also have disadvantages. If you die, the loan balance will come due immediately. The house is sold but, if the loan exceeds the value of the home, the balance is due from your estate. The same is true if you sell your home or move out. You must pay the outstanding balance of the loan whether or not the property value of your home has dropped.
If you get a reverse mortgage, you will need to be aware that you will be required to make home improvements, pay property taxes, make repairs on the property, and keep insurance because you will retain the title while the loan is in effect. These costs can be taken from the reverse mortgage funds.
There are closing costs, mortgage insurance premiums, and closing costs associated with a reverse mortgage. There may be servicing fees during the life of the mortgage loan. This varies from lender to lender. Variable rates of interest, rather than fixed rates, are usual for this type of loan. This means that the interest amount will change as the market changes. Interest is added each month to the amount owed at the end of the loan.
Although a reverse mortgage does not affect Social Security or Medicare benefits, it will severely impact Medicaid and food stamp benefits. The government will take all income into consideration for these latter benefits, so a reverse mortgage’s funds will probably keep you from getting them.
When you die, instead of leaving your home to your children, your home will be sold and the loan, fees, and interest would be paid. If there is anything left over after that, your estate would receive it. The interest on reverse mortgages is not deductible until the loan is paid in part or in full.
Because the housing market has fallen so much over the last few years, you must consider whether a reverse mortgage solutions would give you the money you would expect. Better options may be to move to a smaller house or wait for the market to go back up.
Reverse Mortgage FAQ
What’s a reverse mortgage? Who can get one? How is it different from a traditional mortgage? How does reverse mortgage work? These are just a few of the many questions people have about this increasingly-popular option.
What’s a reverse mortgage?
A reverse mortgage gives you cash based on the equity in your home. The older you are and the more equity you have, the more money you can borrow.
How old do I have to be to qualify?
Generally, you must be 62 years of age or older.
How much are monthly payments?
Unless you take out an uninsured mortgage, there are no monthly payments. The money that your lender gives is yours to keep until you sell your home, move out or die. You’re payment-free until one of these things happens.
If you receive an uninsured reverse mortgage, you select a fixed term when you sign the paperwork and receive your money. When this term is up, you begin repaying – with all interest and any other charges.
Do I pay interest?
Yes. It accrues until one of the three things that we just discussed happens. Sometimes the APR (Annual Percentage Rate) of interest is fixed, but sometimes it can fluctuate. You’ll know what to expect before you sign the paperwork, though.
What can I do with the money?
Almost anything you want. People who have taken these mortgages use them to travel, pay medical bills, maintain their quality of life, repair or remodel their homes and many other things. Your lender can tell you more.
Do I have to own the home?
Can I lose my home?
No. It’s yours to live in until you sell, move out or die. Unlike regular mortgages, you aren’t risking foreclosure if you miss a few monthly payments.
Do I keep the title to my home?
Yes. This means that you can’t lose your home, but also that you’re still responsible for paying taxes and other related expenses.
How am I paid?
You can receive a lump sum, regular payments, or a line of credit. Or, you can receive a combination of these three. Check with your lender to see what options are available to you, and be sure to ask about any fees associated with your preference. Opening a line of credit, for example, might cost you money.
Will this affect my Social Security/Medicare benefits?
No. Another good thing is that this money is non-taxable.
Do I have to pay the associated fees up front?
Typically, your lender can give you the option of financing the fees instead of paying them immediately. Be prepared to pay interest on these fees if this is the case.
Are there different types of reverse mortgages solutions?
There are three types.
Uninsured – the main difference being the fixed term that we’ve already discussed. Be prepared to begin repaying at the end of the term.
Lender-insured – a private lender backs the loan.
FHA-insured – the option that you’ll use if you go through the Department of Housing and Urban Development (HUD) for your reverse mortgage.
Tip: your heirs will probably like this option best. If you die and leave the house to them without first paying off the reverse mortgage, they have up to a year to sell. If they can’t cover the debt, the FHA gives the lender the difference.
Okay, what’s the catch?
The biggest catch to a reverse mortgage is that, because you don’t make regular payments, the interest is tacked on to the principal every month. You’ll end up with compounded interest, which can be high.
Where do I sign up?
Before you start filling out mortgage paperwork, talk to the American Association of Retired Persons for more information. You should also consult your financial planner or advisor, or even a tax attorney, to get a better understanding of the reverse mortgage. These people can also help you figure out which plan, if any, is right for you.
You should also consider options other than a reverse mortgage before you start filling out the paperwork. You could find some other idea that works even better for your needs, so investigate and be aware of reverse mortgage disadvantages before you make a commitment.
For more information, you can visit these Web sites:
AARP’s site at aarp.org.
The Federal Trade Commission at ftc.gov
HUD at hud.org