What Is A Reverse Mortgage?If you’re a homeowner and think that an investment to help provide you additional income during your retirement years sounds attractive, you may want to look into a reverse mortgage. Many folks like you use these funds to supplement Social Security or other income, meet medical expenses, pay for in-home care and make home improvements. As reverse mortgages are not well understood by most folks, here’s some background information to help you decide if this is a suitable investment for you. Basics Of Reverse MortgagesA reverse mortgage is a type of loan, typically in the form of a line of credit, that allows homeowners - ages 62 and older who’ve paid off their mortgage or have, at least, 50% equity - to borrow part of their home’s equity as tax-free income. Vacation homes or rental properties are not eligible. Unlike a regular mortgage in which you make payments to a lender, with a reverse mortgage, the lender pays you. If you elect to do this, this kind of mortgage won’t have a monthly payment and you don’t have to sell your home - in other words, you can continue to live in it. However, when the primary homeowner dies or moves, the mortgage is payable in full. If you can’t, or won’t, pay off the debt, the lender can then sell your home to recover the money it’s owed. You have flexibility in the ways to receive the money from the lender: a lump sum, a monthly payment, a line of credit or a combination. If the value of your home appreciates and becomes worth more than the reverse mortgage loan balance, you or your heirs may receive the difference. Your reverse mortgage becomes due after your death. The title remains with your family members or heirs. They can keep the home either by repaying the loan or refinancing the note with a new conventional mortgage or the lender will sell your home to pay off the balance of the loan. The repayment of whatever amount of a loan balance may be deferred until the last borrower or non-borrowing spouse either dies, moves or sells the home. Reverse Mortgages Explained In DetailAs mentioned, to be eligible for a reverse mortgage, the primary homeowner must be age 62 or older. In addition:
The amount a homeowner can borrow, known as the principal limit, varies based on the age of the youngest borrower or eligible non-borrowing spouse, current interest rates, the HECM mortgage limit ($822,375 in 2021) and the home’s appraised value. Homeowners are likely to receive a higher principal limit the older they are, the more the property is worth and the lower the interest rate. The amount might increase if the borrower has a variable-rate HECM. With a variable rate, options include:
If you choose a HECM with a fixed interest rate, on the other hand, you’ll receive a single-disbursement, lump-sum payment. Different Types Of Reverse MortgagesThere are different types of reverse mortgages. Each fits a different financial need. If you need a fixed amount for a specific repair or a tax bill, then a single-purpose reverse mortgage is the cheapest option if you can find one. If you have a high-value property and need more than the lending limit, your only option is a proprietary reverse mortgage. If you don't meet either of those criteria, then a standard HECM is your best option. Home Equity Conversion Mortgage (HECM)The most popular type of reverse mortgage, these HUD-insured mortgages usually have higher upfront costs…but the funds can be used for any purpose. In addition, you can choose how the money is withdrawn, such as fixed monthly payments or a line of credit (or both options simultaneously). Although widely available, HECMs are only offered by Federal Housing Administration (FHA)-approved lenders, and before closing, as also noted above, all borrowers must receive HUD-approved counseling. Proprietary Reverse MortgageThis is a private loan not backed by the government. You can typically receive a larger loan advance from this type of reverse mortgage, especially if you have a higher-valued home. Single-Purpose Reverse MortgageThis mortgage is not as common as the other two. It’s usually offered by nonprofit organizations and state and local government agencies. A single-purpose mortgage is generally the least expensive of the three options; however, as the title suggests, borrowers can only use the loan (which is typically for a much smaller amount) to cover one specific purpose, such as a handicap accessible remodel. Because proprietary reverse mortgages are not federally insured, they don’t have up-front or monthly mortgage insurance premiums (MIPs). That means you can probably borrow more. Whether this makes it better than a HECM depends on the lender's interest rate and how much they're willing to advance based on the home's value to compensate for the lack of mortgage insurance. It’s also important to be aware that, regardless of the type of reverse mortgage, you shouldn’t expect to receive the full value of your home. Instead, you’ll get a percentage of that value. The amount you receive will also be affected if your home has any other mortgages or liens. Other considerations include if there’s a balance from a home equity loan or home equity line of credit (HELOC), for example, as well as any tax liens or judgments. Those obligations will have to be paid with the reverse mortgage proceeds first. How Much Does A Reverse Mortgage Cost?The closing costs for a reverse mortgage aren’t particularly cheap, but the majority of HECM mortgages allow you to roll the costs into the loan so you don’t have to shell out the money upfront. Doing this, however, reduces the amount of funds available to you through the loan. Here’s a breakdown of HECM fees and charges, according to HUD:
Keep in mind that the interest rate for reverse mortgages tends to be higher, which can also add to your costs. Rates can vary depending on the lender, your credit score and other factors. Further, the interest on a reverse mortgage accrues every month. You’ll still need to have adequate income to continue to pay for property taxes, homeowners insurance and upkeep of your home. Pros & Cons Of A Reverse MortgageWhile borrowing against your home equity can free up cash for your daily living expenses, the mortgage insurance premium and origination and servicing fees can add up. Here are some advantages and disadvantages of a reverse mortgage. Pros
Cons
Can You Lose Your House With A Reverse Mortgage?There are conditions for keeping your reverse mortgage in good standing and, if you fail to meet them, you could lose your home. The ways you could violate the terms of a reverse mortgage include:
If you fail to pay property taxes, for example, or keep the home properly insured, the loan servicer could advance available loan proceeds from the reverse mortgage to cover these expenses. If there are not adequate proceeds available to cover these types of payments, the servicer could elect to advance its own funds to make the outstanding payments. Other ConsiderationsIf the loan balance exceeds the home’s value, you or your heirs may need to foreclose or otherwise give ownership of the home back to the lender. There are also potential complications involving others who live in the home with the borrower, and what might happen to them if the borrower dies. Family members who inherit the property will want to pay close attention to the details of what is necessary to manage the loan balance when the borrower dies. Additionally, while not all reverse mortgage lenders use high-pressure sales tactics, some do use them to attract borrowers. It’s almost always best to receive guidance from a nonprofit agency that offers reverse mortgage counseling before signing a loan agreement. Taking advice, without getting the facts from a trusted, independent resource, can leave you with a major financial commitment that may not be good for you. Next StepsIf a reverse mortgage still feels like a good idea for you, take time to research your options. It’s best to speak with a HUD-approved counselor before committing to a reverse mortgage (and if you want a HECM, you’ll be required to). A counselor can help you outline the pros and cons and how this kind of loan might affect your heirs after you pass away. To locate an FHA-approved lender or HUD-approved counseling agency, you can visit HUD’s online locator or call HUD’s Housing Counseling Line at 800-569-4287. Guest post written by Michael Maehl. Mike Maehl’s investment career began in 1973 with his training at 120 Broadway in New York after graduating from Northern Illinois University in 1967 and serving in Vietnam as an infantry platoon commander in the Marine Corps. Mike joined Opus 111 Group as a Senior Vice President and head of its Spokane office in 2008. In 2020, Mike established an additional office in Arizona and actively serves clients in both locations. He hosts a weekly hour-long call-in program on investing, the markets and the economy called ‘Money Management’ on Saturdays at 9am Pacific. He can be heard live online by going to kxly920 and clicking on listen. Contact him at m.maehl@opus111group.com for more information. |