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Reverse Mortgages: Friend or Foe?
What You Need to Know About This Key Financial Tool for Seniors
With so many scams out there specifically targeting senior residents, it’s understandable that anyone would be wary about specialty loan products built just for them. That’s why many people choose to stay far away from reverse mortgages.
Thankfully, you have a step up on the average person. You have the Everest team on your side: ready with hard truths, busted myths, and expert advice for those 62 and older.
So, let’s take a deep breath and look at the facts together. To help us out, we’ve enlisted the help of Everest Senior Loan Originator, Faye Berkowitz. Thanks, Faye!!
What is a reverse mortgage?
A reverse mortgage is a unique type of loan specifically designed for people aged 62 and older. It enables current homeowners to convert part of their home equity into cash, without having to sell their home or, in some cases, take on monthly payments.
“I think reverse mortgages get a bad rep because many people don’t understand how they work,” Faye explains. “They’re not a product that is discussed as often because of the age limit – but I often recommend them to my senior clients as a dignified way to get the funds they need without dealing with monthly payments on conventional loans or borrowing money from family.”
Unlike traditional mortgages, reverse mortgages work in the opposite way – literally. In this case, the lender pays the homeowner an agreed-upon amount. Then, repayment is deferred until the homeowner moves, sells the property, or passes away. For some clients, the bank will pay out the annual taxes on the property from a line of credit; it all depends on the specific terms of the loan. Clients are still responsible for making property tax and homeowners insurance payments during the life of the loan.
This can be a helpful financial tool for seniors with significant home equity and limited cash flow. A reverse mortgage can help them meet everyday expenses, medical costs, or other crucial needs.
“Some borrowers also use reverse mortgages to help their children,” Faye says. “They’ll take out the mortgage and use the funds to help their child buy a house, a car, or some other larger expense. It can be a huge benefit for parents looking to do more for their families.”
Some of the other key benefits of a reverse mortgage include:
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No need for monthly payments
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Less risk of losing the home to foreclosure
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Flexible payment and disbursement options
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No effect on social security or medicare payments
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Home equity is transferred into tax-free cash
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No minimum credit score to qualify
3 Key Features of a Reverse Mortgage
Like all financial products, reverse mortgages break down into three key features: eligibility, disbursement, and payments.
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Eligibility – The homeowner must be at least 62 years old and must have significant equity in their current primary residence. Primary residences include things like single-family homes, condos, townhouses, and some manufactured homes.
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Disbursement – Borrowers can choose to receive their loan proceeds in the form of a lump sum, monthly payments, a line of credit, or a combination of these. The choice depends on the homeowner’s financial situation as well as the specific type of reverse mortgage.
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Payments – Unlike a regular mortgage, reverse mortgages don’t require monthly payments. Instead, the loan balance (including interest) accumulates over time (aka. compound interest) and is repaid when the borrower moves, sells the house, or passes away.
“Reverse mortgages are very flexible,” Faye explains. “It’s much easier to qualify than a traditional mortgage – even with little or, in some situations, no income. And even though you don’t have to repay until you move, sell, or pass on the property as inheritance – many borrowers choose to pay on the interest when they can, to reduce the overall cost of the loan. The option to pay or not pay on it while the loan is active is a huge difference compared to a traditional mortgage.”
Different Types of Reverse Mortgages
There are three primary types of reverse mortgages:
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Home Equity Conversion Mortgage (HECM) – This is the most common type of reverse mortgage. It is insured by the Federal Housing Administration (FHA) and is available through FHA-approved lenders. These loans only apply to homes where the value falls under the conforming loan limit set by the Federal Housing Finance Agency.
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HECM for Purchase – This option allows seniors to purchase a new home using a reverse mortgage instead of a traditional one. This allows them to combine the benefits of home equity and home ownership without monthly payments.
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Proprietary Reverse Mortgages – These loans are for homeowners with high-value properties that exceed the limit of HECM loans. These products are not government-insured, so they may offer higher loan amounts. However, they also come with higher risks.
The loan product you choose should depend on your unique situation. This is where your loan originator can step in and give you crucial feedback.
“A reverse mortgage is a very unique product,” says Faye. “It has its pros and cons, of course, but that’s what experts are for. A senior loan officer can help guide you through the specifics of the product and advise on whether or not it would be a good fit for you.”
Once you’ve chosen your preferred loan product, your loan originator can guide you through the application and underwriting processes, so you can focus on making the most of your loan.
How do reverse mortgages work?
In a reverse mortgage, the homeowner retains the ownership of their home (or buys a new one) and continues to live in it. The loan is secured by the home itself, and the lender disburses payments to the homeowner based on the home’s equity. Over time, the loan balance increases. However, since home values increase steadily due to appreciation, the higher loan balance may not necessarily have such a big impact on the net equity.
“A reverse mortgage gathers what we call “compound interest”, explains Faye. “This means that any interest that accrues goes toward the balance due. While this can be expensive, many borrowers choose to pay on the interest when they can, to reduce the overall cost and interest accrual. If they do make payments, they still have the peace of mind knowing that they can easily draw this money at any given time, should they need the cash.”
When the borrower permanently leaves the home – either by moving or passing away – the loan becomes due. In most cases, the home is then sold to repay the loan and any remaining equity is passed down to the borrower’s heirs. These individuals also have the option to pay off the reverse mortgage themselves and keep the home.
How much does a reverse mortgage cost?
We’re not going to beat around the bush: reverse mortgages can be expensive – with upfront mortgage insurance premiums (MIPs) plus the standard closing costs. Because these costs are often rolled into the loan, they reduce the homeowner’s remaining equity more quickly over time. However, federal laws protect borrowers and their estates from owing more than the home’s value. This is the case even if the loan balance might exceed that value due to a declining market or a longer life expectancy of the owner.
“It’s important to keep an eye on the whole picture of the loan,” says Faye. “Yes, the upfront cost can be a bit more than a conventional mortgage, but sometimes it can be a bit less. It really depends on the situation. It’s also important to remember that these loans are not subject to mortgage tax which some states, like New York, charge at the time of closing.”
The key here is to work with an experienced individual who can help you decide if a reverse mortgage would be a good fit for you. They’ll take into account your current finances, expected costs, and other life factors to provide their recommendations. This can help you to make a more informed decision.
Who should consider a reverse mortgage?
Reverse mortgages can be a good option for seniors who:
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Want to remain in their home, but need extra income
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Have substantial home equity but limited liquid assets
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Don’t qualify for traditional loans due to credit or income constraints
All in all, reverse mortgages are best-suited for individuals who intend to stay in their current or new home for an extended period. Those who take out a reverse mortgage and then move out within a few years may find the upfront costs to be too high to justify the loan. Borrowers should also have no pressing need to leave the property to their heirs when they pass away – since that may not be feasible.
As with any loan product, it is especially important to be aware of the potential risks of the financial product you’ve chosen. Thankfully, we have our Everest expert to walk us through some of those:
3 Risks of Reverse Mortgages
#1: Home Equity Depletion
“Over the course of a reverse mortgage, the homeowner’s equity decreases, leaving less available for their estate or heirs,” explains Faye. “However, many borrowers consider this a worthwhile risk.”
#2: Higher Fees
“Reverse mortgages require an upfront payment on mortgage insurance, along with other standard charges.” Faye says. “The compound interest also tends to concern people. Really, though: the upfront costs and ongoing expenses of any loan can be substantial, but they don’t have to become overwhelming. An experienced loan originator can help you select a product and set a course of action that fits your budget and plans for the future.”
#3: Foreclosure Risk
“As with any mortgage, borrowers are required to maintain their home, pay property taxes, and continue to pay homeowners insurance. Failure to do so can lead to foreclosure. However, since reverse mortgages do not require monthly payments on the loan, that is one less thing borrowers would need to be concerned about.” Faye explains.
It’s also important to note that Everest does not recommend pursuing a reverse mortgage without the support of an experienced loan originator. This is because mortgage scams often target older adults. An experienced loan originator will have reliable, trustworthy connections to acquire your loan – keeping you away from organizations and individuals who may try to misuse a mortgage agreement for their own gain.
All in all, a reverse mortgage can be a powerful financial tool for seniors looking to tap into their home equity without giving up their residence or taking on monthly loan payments. Your Everest loan originator can help you consider the costs, long-term impact, and potential risks – and help you weigh them against the many potential benefits.
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