Many of us have seen commercials for reverse mortgages on TV, or heard some “buzz” about them from friends or relatives. We’ve heard mentioned the potential benefits, which include sizable, one-time or even monthly income potential, no monthly mortgage payment and getting to stay in your current home and maintain full title. And we’ve probably even thought to ourselves that, at least on the surface, the benefits of a reverse mortgage sound pretty good indeed!
But homeowners, understandably still skeptical about non-traditional or non-fixed-rate mortgage products as a result of the financial crisis, are more apt than ever before to thoroughly investigate such products before committing. Fortunately, there’s quite a bit of information and resources available on reverse mortgages, including input from the over one million US homeowners who have now opted for a reverse mortgage of their own.
As we explore the key characteristics of reverse mortgages and provide insights, you will be able to decide for yourself if a reverse mortgage is a safe, prudent choice that meets your family’s financial needs and objectives.
How Do Reverse Mortgages Work?
The obvious tradeoff, however, is that your home and its equity, which likely comprises your most valuable asset, are being converted to a single (and perhaps substantial) debt that you or your estate will someday have to settle. Now, when that will ultimately be depends on one of several possible “Maturity Events” taking place, any of which will result in the loan being called due by the servicer.
A maturity event might include:
- The sale of the home or a transfer of its title by the borrower
- Vacating the home and/or renting to a third party
- The borrower’s death
- Failure to pay taxes, insurance, fees and other obligations
- Allowing the home to fall into a state of disrepair
Once the reverse mortgage is called due by the servicer, the borrower or their estate will be responsible for paying either, the balance due on the loan or a sum equal to 95% of the home’s appraised value at the time, whichever is less.
Are You a Viable Candidate for a Reverse Mortgage?
To qualify for a reverse mortgage you must:
- Be at least 62 years of age and be named on the home’s title
- Use the home as your primary residence, meaning occupy the dwelling for at least 183 days per year (barring any medical exceptions)
- Complete a counseling session with a trained reverse mortgage professional either in person or over the phone. This counseling session typically lasts around 90 minutes and is done to ensure you fully understand the reverse mortgage product, as well as your rights and obligations as a borrower.
Ways to Determine Whether a Reverse Mortgage Is Your Best Option
Merely qualifying, however, doesn’t guarantee that a reverse mortgage is the best choice for you and your family. It’s important to closely consider your age, income, estate plans and your level of health among other factors, before deciding. Therefore, before you opt to take out a reverse mortgage on your home, here are several important questions and factors that will impact your decision:
- How much equity is currently in your home? Those who have been in their homes for many years, and who have paid down principal and built up sizable equity stakes, make the best reverse mortgage candidates. Because the balance on your current mortgage (if any) first needs to be paid off using the reverse mortgage proceeds, you’ll only want to opt for a reverse mortgage if enough capital will still be left over to help you achieve the financial objectives to which you currently aspire.
- How long do you intend to stay in your home? Because there are fees and considerable upfront costs associated with reverse mortgages, borrowers who don’t plan to remain in their homes beyond the next few years may wish to weigh other options besides a reverse mortgage. For such individuals, it’s possible that annuities or other investment and/or lending products could be more cost-effective tools for achieving similar objectives.
Do you plan to leave the home to a spouse or heirs? If you are married, it’s crucial to consider whether your spouse meets the age and title requirements above and can be listed as a co-borrower. If not, your reverse mortgage would stand to be called due upon the borrower’s death. In addition, if you hope to leave your home to your heirs or estate, a reverse mortgage can have significant bearing and legal effect on this transaction.
- Can you afford remaining housing expenses? While a reverse mortgage would stand to eliminate their monthly mortgage payment, many individuals and families on fixed or low-to-moderate incomes still struggle under the weight of remaining housing costs like taxes, homeowners insurance, necessities and maintenance costs. Those in financial danger or distress may want to explore other options up to and including selling their home and downsizing to one that’s more affordable and less expensive to live in and maintain.
- Do you need the reverse mortgage proceeds right now, or perhaps more down the road? The fact is that a reverse mortgage is an expensive way to finance non-essential purchases like autos, vacations, leisure and recreational activities, especially when compared to traditional mortgages or taking out a home equity loan or line of credit. When it comes to financing more urgent needs like healthcare or medical treatments, however, it may be a much more sensible option.
What to Do Now
Don’t stop here! Please consult the information and links below to learn more about reverse mortgages, explore other viable income-producing investment or insurance options, and read more about important topics like homeownership and estate planning.