By definition, a reverse mortgage loan — also known as a home equity conversion mortgage — allows you to borrow against the equity you’ve built up in your home if you’re age 62 or older. Insured by the Federal Housing Administration, an HECM loan provides funds to help pay for the things you need or want — while you continue to live in and retain ownership of your home. Learn more to find out whether reverse mortgages are a good deal for seniors.
Reverse Mortgage vs. Conventional Mortgage
How does a reverse mortgage work? Unlike a conventional mortgage or home equity loan, an HECM offers a flexible repayment feature so you can better control your monthly expenses and cash flow. No minimum monthly loan payment is required; you can choose to pay as much or as little as you like each month. The loan doesn’t have to be repaid until you sell the home, pass away or move out. But you can also pay down the loan at any time, with no penalty — the choice is yours.
If you have an existing first or second mortgage on your home, don’t be discouraged — you might still be eligible. In fact, many homeowners use an HECM as a way to continue owning and living in their home with greater financial flexibility.
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Who Can Get a Reverse Mortgage?
You must meet these requirements in order to qualify for a reverse mortgage:
- Be age 62 or older
- Live in your home
- Own your home
- Pass a financial assessment to ensure that you can keep current with property taxes, insurance and maintenance.
Also, your home must be your primary residence and meet U.S. Department of Housing and Urban Development minimum property standards. Houses and most condos qualify, and homes with existing mortgages might, too.
How to Get a Reverse Mortgage
Aside from meeting the aforementioned requirements, getting a reverse mortgage has other conditions. To get a reverse mortgage, you must:
- Fill out an application
- Have a pre-loan consultation with an independent, FHA-approved reverse mortgage counselor
- Undergo a financial assessment
These consultations ensure that prospective borrowers understand whether a reverse mortgage is appropriate, and allow them to confirm their ability and willingness to meet loan obligations. Prospective borrowers should feel comfortable asking any questions so they can get information that helps them to understand exactly how a reverse mortgage works, and to determine if it is actually the best product for them.
Here are some questions to ask before taking out a reverse mortgage:
- How would a reverse mortgage help me accomplish my retirement goals?
- How would a reverse mortgage strengthen my retirement security?
- How long do I plan to live in my home?
Pros and Cons of Reverse Mortgages
In recent years, enhancements have been made to the HECM program. As a result, financial advisors and other trusted professionals have discovered that a reverse mortgage can be used in different ways as an effective part of a sound retirement funding strategy that can help people live with greater financial flexibility.
For example, today’s HECMs can help homeowners aged 62 and older avoid tapping into their nest eggs at retirement age or in the early years of retirement. Using a reverse mortgage — especially one with lower up-front costs such as the low-cost credit line option offered by Reverse Mortgage Funding LLC — can significantly extend their retirement income, improve their lifestyles, help retirees maximize their Social Security benefits, and live the retirement they’d always imagined.
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Pros of a Reverse Mortgage
Reverse mortgages offer a number of positive features, including the fact that you can continue to own and live in your home. Before taking the plunge, understand all the advantages of such a financial plan so you can better see how it might work for you.
Here are some advantages of an HECM loan:
- Accessibility: You can get your funds in a way that works best for you — a lump sum or a continuously accessible line of credit, for example.
- Existing mortgage payoff: You can use HECM funds to pay off your existing mortgage.
- No monthly payments: No monthly mortgage payments are required as long as you live in the home, continue to pay property taxes and homeowners insurance and maintain the property.
- Minimal out-of-pocket expenses: With the exception of a counseling fee, most fees associated with a reverse mortgage can be financed with your loan. Closing costs and ongoing fees can be financed with the loan.
- No extra taxes: Generally, loan proceeds aren’t considered taxable income. Consult a tax professional to make sure your situation meets the requirements.
- Beneficial to heirs: Research by Wade Pfau, Ph.D., CFA, shows that if used properly, a HECM could increase the amount of a client’s retirement savings that could transfer to their heirs.
- Access to more funds: If the value of your home increases, you might consider refinancing your reverse mortgage to access even more loan proceeds.
- Equity ownership: After the loan is repaid, any remaining home equity belongs to you or your heirs.
Cons of a Reverse Mortgage
To determine whether an HECM is the right solution for you, you should understand that challenges of this kind of loan. Here are some disadvantages to expect with a reverse mortgage:
- Increasing balance: The loan balance increases over time as interest on the loan and fees accumulate.
- Decreasing assets: A lien on your home will apply for the outstanding HECM amount, and as you use home equity, fewer assets are available. You can still leave the home to your heirs, but they’ll have to repay the loan balance.
- Higher fees: Fees might be higher than with a traditional mortgage.
- Effect on benefits: Eligibility for need-based government programs, such as Medicaid or Supplemental Security Income, could be affected. Consult a benefits specialist to find out details.
- Sooner due date: The loan becomes due and must be repaid when a “maturity event” occurs; maturity events include the last surviving borrower — or non-borrowing spouse meeting certain conditions — passing away; the home no longer being the borrower’s principal residence; the borrower vacating the property for more than 12 months. The loan will also become due if the homeowner fails to pay his property taxes or homeowners insurance, or fails to maintain the property.
- Required insurance: Per FHA requirements, HECMs need mortgage insurance premiums.
Some lenders, such as Reverse Mortgage Funding LLC, a leading reverse mortgage lender, offer a low-cost pricing option, which eliminates nearly all origination and closing costs. But as with any home-secured loan, you’ll still be responsible for paying property-related taxes, HOA fees, homeowners insurance and other policies, and upkeep costs.
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Disclaimer: The author is not licensed to originate or solicit mortgage loans. 2017 Reverse Mortgage Funding LLC, 1455 Broad Street, 2nd Floor, Bloomfield, NJ, 07003, 1-888-494-0882. Company NMLS ID: #1019941 (www.nmlsconsumeraccess.org, http://www.nmlsconsumeraccess.org). Arizona Mortgage Banker License #0927682; licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; loans made or arranged pursuant to a California Finance Lenders Law; Georgia Mortgage Lender Licensee #36793; Illinois Residential Mortgage Licensee; Massachusetts Mortgage Lender License #ML1019941; licensed by the New Jersey Department of Banking & Insurance; Rhode Island Licensed Lender; Texas Mortgage Banker Registration in-state branch address 6044 Gateway East, Suite 236, El Paso, TX, 79905. Not intended for Hawaii and New York consumers. Not all products and options are available in all states. Terms subject to change without notice. Certain conditions and fees apply. This is not a loan commitment. All loans subject to approval. L820-Exp022018.