For many people living month to month on Social Security Income or who had once robust retirement accounts ravaged by the not-so-great recession, the reverse mortgage seems like an attractive choice. But, before you dive in there are a few things you need to know in order to make an informed decision about whether or not this is the right choice for your circumstances.
What is a Reverse Mortgage?
You may hear about other types of reverse mortgages in the marketplace today, but there is only one that is federally insured. It is called the Home Equity Conversion Mortgage, or HECM. This loan is only available through FHA approved lenders.
A reverse mortgage differs from a traditional home equity loan in that you are not required to make monthly principle or interest payments on the loan. Maturity is reached, and the loan must be repaid, when the home owner no longer lives in the home as his or her primary residence or certain other conditions, in accordance with the loan agreement, are met.
Reverse Mortgage Requirements
In order to qualify for a reverse mortgage, the home itself, along with the homeowner, must meet certain conditions.
Homeowner Requirements
- Homeowner must be 62 years of age or older.
- The home must be owned outright or carry a low enough balance that it can be paid off at closing with the proceeds from the reverse mortgage.
- Homeowner must have the financial means with which to pay property taxes and insurance on the home.
Requirements for the Home
There is a little bit of flexibility when it comes to the homes themselves. Properties eligible for reverse mortgages include:
- Single family homes
- Two to four unit properties in which the owner occupies one unit
- HUD-approved condominiums
- Manufactured homes built after 1976
- Town homes
Pros of Reverse Mortgages
There are quite a few benefits to consider when it comes to reverse mortgages, not the least of which is the easy approval for these loans. In some instances, when credit or income seems insufficient to meet the terms of the loan long-term, borrowers may be required to set aside funds in an escrow account to cover the costs of yearly taxes and insurance premiums for the home. Otherwise, approval is fairly straightforward.
Another big benefit for most seniors is the option to receive a lump sum payment or to spread the payments out over time in order to generate a steady stream of income. For those on fixed incomes, this can be extremely beneficial, just as it can benefit people who need one large payment for something like medical treatments or to make their home wheelchair or walker accessible.
No repayments necessary while the homeowners maintain the home as a primary residence.
Cons of Reverse Mortgages
While the attractiveness of a reverse mortgage is certainly attractive, there are a few considerations to keep in mind. The first consideration is a big one, or it can be. That is the cost of the reverse mortgage itself. There are many fees associated with mortgages in general include:
- Mortgage insurance fee
- Appraisal fee
- Title insurance fee
- Closing costs (which are substantially higher than with traditional mortgages)
- Interest
The other consideration that weighs heavily upon the minds of many seniors considering reverse mortgages, as it should, is the requirement to pay back the loan, in full, if you are no longer a permanent occupant of the home. In other words, if you are required to move into an assisted care facility, then the full force of your loan will become due.
Finally, the reverse mortgage impacts how much money you leave to your heirs. While that isn’t the primary consideration for everyone considering reverse mortgages, it is important to many, and worth taking into account.
Alternatives to Reverse Mortgages
Seniors are motivated for many different reasons to consider reverse mortgages in the first place. Whether it involves tight funds for retirement, a one-time expense that is too large to easily accommodate on a fixed income, or retirement dreams gone up in smoke during the market meltdown of previous years, there are alternatives to the reverse mortgage to consider.
- Cashing out life insurance policies.
- Part-time employment.
- Consulting with a financial advisor for ways to stretch your retirement.
- Selling your home and moving into a smaller home.
- Downsizing to one automobile rather than two.
- Reducing expenses and creating a budget.
This isn’t to say that reverse mortgages are never a good idea. You can’t take it with you, after all. It’s simply not a decision to be taken lightly either. Keeping these things in mind will help you make the best choice for you and your family.