A Reverse Mortgage Guide
For the elderly with shrinking savings, reverse mortgages offer a low-risk source of extra income. This reverse mortgage guide will assist you in determining if you're a good candidate for a reverse mortgage, how they work, and the risks involved.
As you get older and your income level tapers off, you may find yourself in a position where your income and savings may not be enough to cover your bills, pay for a needed home improvement, or pay for a medical issue your insurance won't cover. Or perhaps you just want to live a bit more comfortably in your later years. If you own a substantial amount of equity in your home, a reverse mortgage may be an option for you to turn the equity into cash.
The reverse mortgage guide below is set up in a Q&A format. Scroll below to find your question or read through them all to learn more about whether this option is right for you.
What is a Reverse Mortgage?
A reverse mortgage is simply a home loan that allows homeowners to convert part of the equity in the home into cash. You get money based on the equity, but unlike other home loans or second mortgages, you don't pay back the loan until you sell the home.
The only requirements for most reverse mortgages are that the home is your principal residence and the reverse loan must be the primary (first to be paid back) loan on the home. If you have a home loan currently, you're not necessarily disqualified, but the reverse loan must be used to pay off the other loan.
Once you and your co-borrower (if there is one) pass away, sell the house, or no longer use it as your primary residence, the reverse loan comes due, and you'll have to repay the amount borrowed plus interest. You must also continue to pay property taxes and maintain insurance on the home. If you fail to do so, the loan will typically become due following such an occurrence.
What are the Benefits of a Reverse Mortgage?
The main benefit of a reverse mortgage is that you can maintain ownership of your home as long as you live in it while receiving an immediate influx of cash. The lender cannot take your home away for missing a monthly payment because there are no monthly payments to miss. The entire loan (including interest, and loan fees) is paid off when the house is sold.
Additionally, you can choose to have the loan paid to you in a lump sum, as monthly payments, or on a schedule of your choosing.
For elderly borrowers, reverse mortgages can be extremely useful because older borrowers generally own their home (meaning they can borrow more against its value) and have fewer sources and opportunities for income. Reverse mortgages can assist these homeowners to make necessary improvements (e.g., fix a leaking roof) and pay bills and have the peace of mind that they will not lose their home.
Do I Qualify for a Reverse Mortgage?
While there are no hard and fast qualifications for reverse mortgages, lenders typically require borrowers to be at least 62 years old. The ideal candidate for a reverse mortgage (that is, those for whom reverse mortgages have the highest reward and lowest risk) is someone who owns their home outright (and its value is high) and is older. This situation is attractive to lenders because 1) the borrower has no creditors who have a claim on the home; 2) the high value of the home is a strong indicator that the lender will recoup all of its money back; and 3) the lender more likely to be repaid their loan sooner (based on actuarial charts).
Which Types of Homes Qualify for Reverse Mortgages?
Generally all single unit homes and homes with 2-4 units (as long as one of the units is occupied by the borrower/owner) qualify for a reverse mortgage. Certain lenders also allow condominiums. The federal government will back reverse mortgage for certain manufactured homes, but lenders do not typically grant reverse mortgages for mobile homes.
How Much Can I Borrow?
The amount you can get on your reverse mortgage depends on factors such as your age, current interest rates, and the value of your home. Those who are older generally get lower interest rates and will be able to borrow more against the value of the home.
The most popular reverse mortgages are obtained through the U.S. Department of Housing and Urban Development (more on this below), which currently has a hard cap of $625,500 per home.
What Are the Disadvantages of Reverse Mortgages?
The biggest drawback of a reverse mortgage is that the debt and interest rise each time you borrow. The new amount and interest is capitalized onto the old debt, so the amount you owe can quickly reach the value of the home. While you don't have to worry about losing your home (as long as you keep paying property taxes, maintain the home, and retain insurance), when you sell the home, there may not be anything left for you or your heirs from the sale.
Additionally, borrowers should be wary of aggressive lenders who purport to be from government agencies. These lenders often charge high fees and interest and attempt to prey upon elderly homeowners who are in need of cash to pay bills, supplement income, and pay for necessary home improvements. More on reverse mortgage lenders below.
Finally, if you wish to leave your home to your heirs, a reverse mortgage is not for you. Because the loan is repaid out of proceeds from the sale of the home, there will be no home to pass down to your heirs. However, anything leftover from the sale after paying back the loan is yours or your estate's and can be gifted as you choose.
What to Know About Reverse Mortgage Lenders
The most popular reverse mortgage lender is the federal government. Through the U.S. Department of Housing and Urban Development (HUD), the government underwrites reverse mortgages to assist elderly homeowners who wish to supplement their income. The federal program is popular because it doesn't charge any loan fees and has a low to moderate interest rate.
Private lenders often charge higher interest rates and tack on loan fees to the reverse mortgage. By doing so, they reduce the amount homeowners can draw from the equity in the home and increase their profits. While private lenders may be necessary for homeowners who cannot qualify for a federal loan, be wary of any lender that charges loan fees.
Some of these private lenders prey upon elderly homeowners by presenting themselves as government agencies with official looking documents in the mail. Be aware that HUD backed reverse mortgages will not charge loan fees, and if you're unsure, directly ask the lender if they are a government agency. Getting a loan through a private lender can significantly add to the cost of the loan.
So, is a Reverse Mortgage Right For Me?
As you may have noted from reading the reverse mortgage guide, reverse loans are extremely useful for elderly homeowners who have substantial equity in their home and wish to stay in it for a long time. When researched properly and for the right people, the advantages of a reserve mortgage can outweigh any potential drawbacks. If you need more assistance than this reverse mortgage guide provides, visit the Federal Housing Authority website.