Reverse Mortgages: A Creative Option for Older Homeowners Who Need Cash
Most of us are familiar with a standard home mortgage, having to send off a payment to the bank every month. But what if it was the other way around, and the bank sent you a check every month you stayed in your home?
Reverse mortgages are a little-known but potentially powerful financial tool. While they are not for everyone, in the right circumstance a reverse mortgage can be just the thing you’ve been looking for if you’ve suffered a loss of income or are otherwise struggling to make ends meet.
Types of Reverse Mortgages
A reverse mortgage allows homeowners age 62 and older to convert a portion of the equity in their homes to cash, so long as the home remains their primary residence. Instead of making monthly loan payments to your lender as in a traditional mortgage, you receive payments from your lender. Thus, the amount you owe on the loan increases and the equity in your home decreases over time.
By far the most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM). HECMs are insured by the Federal Housing Administration (FHA), which means that the FHA will guarantee that lenders follow strict rules imposed by the government. Based on your age and your home’s value, the FHA will tell HECM lenders how much they can give you in a reverse mortgage.
Another type of reverse mortgage is the single-purpose reverse mortgage. The money obtained from a single-purpose reverse mortgage may only be used for a certain things, such as home improvements or paying property taxes. While single-purpose mortgages are usually the least expensive reverse mortgages, they are typically only available to low and moderate income homeowners. Single-purpose reverse mortgages may be offered by state and local governments or nonprofit lenders.
Finally, some financial institutions offer their own reverse mortgages. Consumers should be especially cautious of these reverse mortgages, because they are not insured by the federal government and are therefore only backed by the private companies that provide them.
Is A Reverse Mortgage for You? The Major Pitfalls
How do you know if a reverse mortgage is for you? Most reverse mortgages do not have minimum asset, income or credit requirements; if you and any other borrowers on the reverse mortgage are at least 62 years old and the home securing the reverse mortgage is your primary residence, you should qualify. But, even if you qualify, there are many considerations you should take into account before signing up for a reverse mortgage.
Just like a traditional mortgage, there are costs and fee associated with a reverse mortgage – often these costs and fees are even higher for a reverse mortgage compared to a traditional mortgage. Loan origination fees, mortgage insurance premiums, closing costs and monthly service fees all accompany a reverse mortgage. If you choose to finance such costs, they will increase your loan balance and accrue interest over the life of your loan. Generally, due to the substantial upfront costs of a reverse mortgage, financial experts do not recommend one for borrowers who intend to move out of their home in three years or less.
As long as you and any other borrowers on your reverse mortgage continue to live in your home and meet basic homeowner obligations (paying property taxes, maintaining a homeowners insurance policy, keeping the property in good repair), you generally are not obligated to repay the reverse mortgage. However, this means that your home will likely have to be sold to ultimately pay back the reverse mortgage (if the amount you owe is less than your home is worth when the loan is repaid, the remainder of the proceeds from the sale will go to you or your estate). Thus, a reverse mortgage is not a good option if you wish to leave your home to loved ones.
One feature of reverse mortgages can be a double-edged sword. For most reverse mortgages, you can never owe more than the amount your home is worth; in technical parlance, such a cap on your debt is referred to as a “non-recourse limit.” This might work to your advantage, in that it means the lender does not have legal recourse to anything other than your home’s value and cannot seek repayment from your heirs (therefore, if your house sells for less than the money owed on your reverse mortgage, the loss is not passed along to your estate or your heirs). However, it also means that younger reverse mortgage holders might run out of money at too young an age; many of these folks would have been better off utilizing the equity in their home in some other type of financial strategy.
Get In Touch With a Debt Relief Attorney to Ensure You Have Explored All Options
Reverse mortgages can be a great debt relief option; they convert the equity locked away in your home into a liquid asset that can help fund your retirement. But, they are also rife with potential pitfalls, and come in a distant second next to other financial options for some cash-strapped seniors.
To find out if a reverse mortgage may be right for you, and to explore alternatives, contact an attorney today. With the right help, you can make a responsible decision that will help safeguard the financial integrity of your Golden Years.