A reverse mortgage might be your way out of a financial crisis or emergency – It’s one of the ways you can tap into your home equity. After all, isn’t buying a house investment in itself?
Is a reverse mortgage a good idea? Read on to find out. We’ll tell you everything- The pros and cons to reverse mortgages.
In simple terms, a reverse mortgage is a loan taken against your home’s equity. Doesn’t this sound like other loans you know of (HELOCs and Second Mortgages)?
Reverse mortgages are special in that they’re promoted to the seniors in the society (a person of 62 years and above). Their main selling point is that the loanee isn’t required to pay monthly repayments. Repayments are only required when the owner dies, permanently moves, or sells the property.
Reverse mortgages have proved useful to seniors whose net worth is usually tied to the value of their estate.
The basics of reverse mortgages can be learned from its name.
“Reverse” in the sense that instead of the homeowner paying monthly payments to the lender as is the case with standard mortgages, in a reverse mortgage, it’s the lender who makes payments to the homeowner.
Will the homeowner make any payments? Yes, instead of the normal monthly installments, the homeowner only pays the interest on the amount he/she receives. The other good news is the owner retains ownership of the property.
We mentioned earlier that the loan is only repaid after the homeowner dies or moves away permanently.
So who repays the loan? If the homeowner dies, the lender goes ahead and lists the house for sale. Whatever money obtained from the sale of the house is then taken in by the lender as payment for the mortgage principal, fees, and insurance.
If the deceased homeowner has any relatives who want to keep the house, they can choose to instead take it upon themselves to repay the reverse mortgage.
Note: Just like any other standard mortgage, the home is still the collateral for reverse mortgages.
There are three types of reverse mortgages:
Today we’ll get into the details concerning the home-equity conversion mortgage since it’s the one that you’re likely to come across. This mortgage type covers all houses with a value of at or below $756,000.
Once you’re done with the formalities involved in securing a home-equity conversion mortgage, you get to decide how you receive your money:
You must be thinking “Sure, all this sounds appealing, but are reverse mortgages worth it?”
Truth be said, home equity isn’t an asset to play around with. It takes years for one to build enough home equity and the last thing you’d ever want to do is make the wrong move.
Reverse mortgages use your home equity as collateral. That being said, you need to either have full ownership of your home or have paid off a huge chunk of the house mortgage. The more equity you have in your home, the more money you can access via reverse mortgages.
For you to attain financial stability, the amount of money you receive from your reverse mortgage needs to be enough to cater to your needs. Always remember that reverse mortgages are debts (good debts) that can be used to settle other high interest and short-term debts. If the amount you get isn’t enough to settle your debts, you’re at risk of running into more financial difficulties down the line. You’d be better off selling your house to cash out all your equity and not end up in debt.
Reverse mortgages will only have to be repaid if the homeowner dies or moves away from his/her property. As long as you stay put, you’ll receive money from the lender and won’t be required to repay it.
Mortgages are never cheap. There are lender fees you’ll have to pay that can be as high as $6000. In addition to that, there is mortgage insurance and other closing fees. It makes no sense to pay for all these only for you to move a few years later. Not to mention the fact that you’ll have broken one of the terms of reverse mortgages and will have to repay the borrowed amount. Most people aren’t able to do this and end up losing their homes.
Many people sit on their home equity and don’t even know that they could live better lives if they tapped into this asset.
Sure, moving away isn’t an option, but reverse mortgages will give you the money to go on vacations or buy gifts for your grand-kids on Christmas. You can even use the money to start that business you’ve always wanted and in the process, earn an income.
Just make sure you’re able to pay off your property taxes on time. Failure to do so and you will lose your house. Tax authorities will list your house for sale to compensate for the property tax you’ve failed to pay. Tax authorities will always have priority over your lender.
You also need to make sure that you’re able to comfortably pay off your homeowner’s insurance premiums and keep up with your home’s maintenance. Failure to do so and your lender will declare your reverse mortgage payable.
Since reverse mortgages are aimed at people of 62 years and above, the majority of people in this age bracket have retired and just want to live the best of their lives. Reverse mortgages can offer you “an extra source of income”. This will allow you to go easy on your retirement assets and enable you to live your best life for as long as you want.
Of course, this is an option for those who don’t intend to leave their house to anyone. After all, it’s the work of your hands and you’re entitled to do as you wish it. In some cases, it could be that your children are well off or you don’t have any children.
You can tap into your home equity as much as you want to. The mortgage will only be due upon your death. When this happens, the lender will list your home for sale and claim the money they lent you.
You find yourself in a situation where your house is in desperate need of repairs or renovation. Keep in mind that most people of 62 years and older are past their working days and as a result, might not be viable for wage-related loans like Home Equity Line of Credit (HELOCs).
Reverse mortgages come in as a way they can tap into their home equity. In addition to that, they also come with one major advantage. Unlike, other loans and mortgages that require you to make monthly installments, reverse mortgages only require you to make small repayments on the interest of the borrowed amount. As a result, you will not suffer from budget strain.
You might be thinking we’re a bit bias and we’re in all in favor of reverse mortgages. However, there are some circumstances where a reverse mortgage is a terrible idea.
Reverse mortgages are lifetime agreements where the lender allows you to convert your home equity to cash for as long as you’re alive, own the property, and live in the house. Leaving or selling the house will first require you to repay the money lent to you or lose the property.
Fail to pay any of these and you will forfeit your house. It’s always important to make sure that the money you get from the reverse mortgage, plus other means is enough to allow you to comfortably cater to these costs.
Reverse mortgages are a bad idea if you’re in poor health and are likely to move out in search of constant medical supervision (nursing homes). You’re not allowed to leave your house for more than a year.
Peace of mind has a lot to do with finding the right loan/mortgage that specifically suits YOU. With Loans Geeks, you get this peace of mind since you won’t have to go through the hustle of contacting multiple reverse mortgage lenders. We’ll do it for you and present you with the best terms that suit your needs.
Not for everyone. By the end of the day, the decision is yours. Get as much information about reverse mortgages as you possibly can and consult a professional financial advisor to make the right decision.
Yes, if you fully understand your current financial situation and can use it to your advantage.
Anyone of 62 years and above with enough home equity is viable for a reverse mortgage. The rest is up to you to decide what you want to do with your house if your health allows it, and whether or not it will improve your current financial situation.
The amount of money you get from a reverse mortgage is directly proportional to value (equity) you’ve built into your home.
Costs may vary from one lender to another. However, there are basic costs like lender fees, origination costs, and upfront mortgage insurance.
The home equity conversion mortgage. It’s the most popular mortgage type in the market.
Fortunately, reverse mortgages aren’t taxable since they are considered as loan proceeds and not income.
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