The Pros and Cons of a Reverse Mortgage
If you are a retired homeowner, or on a fixed income you may be thinking about a reverse mortgage to help out with major bills, renovations or even day to day expenses. Before you pull the trigger on a reverse mortgage it is important to understand the basics of a reverse mortgage as well as your obligations and the impact It can have on your heirs.
Here is a quick overview of everything you need to know about reverse mortgages:
Reverse Mortgages Explained
A reverse mortgage is a loan that lets a homeowner convert some or all of the equity they have in their home into cash while allowing the homeowner to stay in the house. As long as you stay in the home, you do not have to pay back the loan but it does come due if you move out of the house, sell it or pass away.
While a reverse mortgage can be a great idea, there have been issues with senior citizens being charged excessive up-front fees so it is important to understand all the details before signing on the dotted line.
The Basics of a Reverse Mortgage
All reverse mortgages have some basic requirements that must be met to qualify. The following are the common requirements of a reverse mortgage:
- All of the owners of the home must be at least 62 years old.
- The homeowners must have equity in the home and everyone that is listed on the title of the home must sign the reverse mortgage paperwork.
- The home must be a primary residence. It is not currently possible to take a reverse mortgage out on a vacation home.
- The home must be in good condition and the homeowner must maintain it during the life of the reverse mortgage loan.
- The homeowner must pay all property taxes, assessments, and maintain homeowners insurance. If you fail to pay any of these required expenses, your loan can be called in and you will have to pay it in full immediately.
- A reverse mortgage cannot be initiated unless the homeowners receives counseling via a Home Equity Conversion Mortgages (HECM) counselor.
Reverse Mortgage Tips from the BBB
Reverse mortgages are complicated so it is important that you fully understand your obligations. A reverse mortgage is a legal contract and it can have many consequences for both you and your heirs so the Better Business Bureau offers the following tips and advice for anyone considering a reverse mortgage:
Talk with a HECM Counselor: Most homeowners are required to consult with a HUD approved HECM counselor before they apply for a reverse mortgage. These counselors will help walk you through your options and let you know if you are eligible for a reverse mortgage as well as discuss the implications it can have for you and your home.
The Fair Housing Administration (FHA) recommends avoiding reverse mortgage services that charge a fee for referring a homeowner to reverse mortgage lender. This information is available for free from the FHA and they have counselors that are available for free or a small fee. Check out the HUD website at www.hud.gov for a list of counselling agencies or call 800-569-4287.
Talk to Your Heirs: A reverse mortgage will have implications for your heirs so you should have a talk with them before signing any paperwork. The reverse mortgage must be repaid from the proceeds of your estate. If your heirs are assuming they will inherit your home you should consult them in the reverse mortgage process.
Make Sure The Loan Makes Sense: Carefully consider all factors with a reverse mortgage to make sure it makes sense for your particular situation. The amount you can borrow will ultimately depend on the location, value and age of your home and it is important to make sure the loan amount will cover whatever expenses you hope to use it for.
Experts recommend that you stay in your home for at least 5-10 years after taking out a reverse mortgage so it important to consider your future plans as well as factor in any mobility issues that could force you out of the home earlier than planned.
If you feel that you may need to move to a smaller home, an assisted living facility or a nursing home in the near future, a reverse mortgage is probably not appropriate for your situation.
The Loan Amount Only Goes Up: Unlike a traditional loan, you will not be making monthly payments on a reverse mortgage so the loan balance only goes up. Each month, interest is added to the balance so the longer you stay in your home, the more money will have to be repaid after you move or pass away. Reverse mortgages are designed so you can never owe more than the home is worth.
Consider All Loan Costs: There are fees with a reverse mortgage just like any other type of loan and you should be aware that you will be responsible for paying these fees. When considering a reverse mortgage make sure that you understand all of the fees and loan costs. Ask questions about anything you don’t understand and if you don’t like the answers, keep shopping.
Common fees include origination fee, closing costs, a mortgage insurance premium, a servicing fee and the interest rate.
Fully Understand Your Repayment Terms: Never enter a reverse mortgage contract if don’t have a complete understanding of the repayment terms. If you have questions, be sure to ask them and until you are crystal clear on how the loan will be repaid, don’t sign on the dotted line.
Reverse mortgages must be repaid if the homeowner sells the home or dies. If the homeowner lets the homeowner insurance lapse, fails to maintain the home or doesn’t pay the property taxes, the loan must be repaid immediately. The homeowner must live in the home, if they fail to live in the home for 12 consecutive months the loan must be repaid.
While a reverse mortgage can be a great idea in some situations, it is not appropriate for all homeowners. Make sure you have a complete understanding of all the terms of the loan as well as your obligations before applying for a reverse mortgage.
For a Home Insurance quote on a reverse mortgage, go to https://www.gorockland.com/homeowner-insurance/quote