First we must ask the question “What is a Reverse Mortgage?”
According to HUD the HECM known as the reverse mortgage is a safe alternative resource that can provide older Americans with greater financial security and independence.
A reverse mortgage is a loan against the equity of the homeowners that meet certain criteria, such as, the minimum age is 62, the property is used for collateral, and you may not have any delinquencies of federal debt. In addition you must participate in reverse mortgage counseling.
There are costs associated with getting a reverse mortgage; the loan origination fee, third party fees such as the appraisal, inspection, lender title policy and other fees. In addition, you will be responsible to pay for the FHA mortgage insurance premiums, servicing fees and the interest on the loan.
The loan generally does not have to be repaid until the last surviving homeowner permanently moves out of the property or passes away. At that time, the estate has approximately 6 months to repay the balance of the reverse mortgage or sell the home to pay off the balance.
In the event of death or in the event that the home ceases to be the primary residence for more than 12 months, the homeowner’s estate can choose to repay the reverse mortgage or put the home up for sale.
If the equity in the home is higher than the balance of the loan, the remaining equity belongs to the estate. If the sale of the home is not enough to pay off the reverse mortgage, the lender must take a loss and request reimbursement from the FHA. No other assets are affected by a reverse mortgage.
Many seniors use it to supplement social security, meet unexpected medical expenses, make home improvements and more.
The borrower must occupy the home as their primary residence. Ensure taxes, Home Owners Association fees are paid and all other obligations pertaining to the home are kept up to date. The property must be maintained in equal condition to when the loan was closed.
Pros for Reverse Mortgage
¨ Remain in the home.
¨ Pay off existing mortgages.
¨ Simple to qualify. With no income requirements.
¨ No monthly mortgage payments
¨ Receives payments on flexible terms.
Credit line for emergencies
Monthly payments
Lump sum distribution
Any combination of the above
¨ A reverse mortgage can not get “upside down”
¨ Heirs inherit the home and keep any remaining equity after the balance of the reverse mortgage is paid off.
¨ Loan proceeds are not taxable.
¨ Lower interest rate.
Cons For Reverse Mortgage
¨ The fees are higher than a conventional mortgage because of the insurance cost.
¨ The loan balance gets larger over time and the value of the estate/inheritance may decrease over time.
¨ Medicaid and other need-based government assistance can be affected if too much funds are withdrawn (and not spent) in one month.
¨ The program is not well understood by most individuals.
The reverse mortgage can be useful, However, since you are loosing equity in the home each day due to the interest rate, the monthly mortgage insurance and the upkeep of the home it would be prudent to look at all your options prior to completing a reverse mortgage. If you are determined to go through with the reverse mortgage make sure you shop around and get the best interest rate and a lender that best fits your needs.
Resource comes from HUD, Reverse Mortgage Guide