Seniors Turning to Reverse Mortgages to Supplement Income
May Be Making Mistake
A growing number of seniors have been turning to the reverse mortgage in order to supplement their retirement income or Social Security benefits, but is this a good option for most folks? The short answer is ‘maybe’. But it is important that any senior looking into a reverse mortgage weigh the benefits and tradeoffs of such a financial agreement, and to choose a reputable lender to write their reverse mortgage. In other words, use the financial wisdom that you have built up over the years to look before you leap. A reverse mortgage can definitely put money that you need into your hands right now, but the process is confusing and some deals that are out there can actually have you putting a lot of money into someone else’s hands, too. For some folks a reverse mortgage can be a lifesaver, however.
What is a Reverse Mortgage?
In simple terms, a reverse mortgage allows a homeowner to borrow equity (the market value of your home minus any balance that is outstanding on an existing mortgage) and then in lieu of making payments to their lender, the lender will make payments to them. Payments can be in the form of either a lump sum or monthly income, as a period cash advance through a line of credit, or any combination of these payouts. To qualify for a reverse mortgage, the homeowner must be at least sixty-two years old and have an adequate amount of equity in their home. The applicant’s credit history and credit score are not relevant when applying for a reverse mortgage. Until the applicant dies or moves out, the mortgage on the home cannot be exercised; this means that the applicant stays in their home, keeps the title to the home, and does not have to repay the lender while enjoying the money – which is the big selling point of the reverse mortgage. When you die or move out, you or your estate can repay the mortgage that is due, or the lender will basically own the home until it is sold to recoup the funds that were extended to you.
Common Reverse Mortgage
The most common reverse mortgages are the home equity conversion mortgage or HECM, which is insured by the Federal Housing Administration or FHA, although there are other reverse mortgage products out there. The costs and terms of the reverse mortgage vary, and taking out the reverse mortgage is far from inexpensive. Quite the contrary; a reverse mortgage is very expensive when compared to other loan types and features fees that are paid to brokers, lenders, and insurers, among others. The future charges of this complex type of mortgage are no predictable, and it is hard to be for certain just how much of the home equity “pie” will go to someone other than you. The amount that can be made available to you on a reverse mortgage is determined by your age, the value of your home, the lender limits, the current interest rate and the future interest rate, and the fees that are associated with writing the mortgage.
Why Reverse Mortgage May Be a Bad Idea
Although the reverse mortgage may be a good idea for some people, it is definitely not right for all seniors. A reverse mortgage is basically a high cost loan. The American Association for Retired Persons (AARP) says that fees and premiums for a reverse mortgage on a house that is worth $250,000 may eat up ten percent or $25,000 of the proceeds. And although the fees, charges, and premiums will not come due until the home is either sold or until you die, the debt continues to accrue over the life of the reverse mortgage. These costs may be offset by a rise in the value of your home, but as we’ve all seen with the housing market, there is certainly no guarantee there.
Simply put, a reverse mortgage could end up taking a big chunk of money out of the funds you would receive if you sold your house, or a lot of money out of the estate that you plan to leave behind to your children or other heirs.
