Reverse mortgages can help older homeowners free up cash in retirement by borrowing against the value of their home.
They can help retirees age in place while producing a stream of income for everyday expenses.
But reverse mortgages are complex and controversial.
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Strict rules must be followed to avoid foreclosure, and the costs can outweigh the benefits.
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What Is a Reverse Mortgage?
Unlike a regular mortgage, you dont need to make monthly loan payments.
Instead, your lender pays you, and your debt increases over time.
The loan is settled or repaid when you sell the home, move out or die.
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Types of Reverse Mortgages
There are three types of reverse mortgages.
HECM loans are non-recourse loans.
These reverse mortgages are much riskier because they are not insured by the federal government.
Theyre typically designed for borrowers with higher home values.
These loans arent available in all areas and only homeowners with low to moderate incomes may qualify.
Next, the counselor will tell you how to apply for a loan through a specific program.
The lender will perform a credit check and review your property (including the title and appraised value).
Your home needs to be in good shape to qualify for a reverse mortgage.
If everything checks out and youre approved, the lender funds the loan.
Like aregular mortgage, a reverse mortgage can have either a fixed rate or an adjustable interest rate.
Reverse Mortgage Cost and Fees
Reverse mortgage fees can be substantial.
These costs include:
Interest and fees are added to the loan balance each month.
Unlike a regular mortgage, the amount you owe on a reverse mortgage increases over time.
Loan proceeds can pay out in one of the following ways:
You choose how funds are paid out.
Most reverse mortgages are processed within 30 to 60 days.
You dont need to make monthly mortgage payments like you would with a traditional mortgage.
Youre still required to pay homeowners insurance, property taxes and HOA fees.
Otherwise, you’re able to face default or even foreclosure.
Many reverse mortgage loans arent repaid by the borrower.
The borrower (or their estate) gets any leftover money from the sale after the loan is paid.
But it comes with costs and risks.
Its important to understand reverse mortgage pros and cons before you sign on the dotted line.
An elder law attorney or financial advisor can also help you explore these options.
Reverse Mortgage Pros
Here are some advantages to getting a reverse mortgage.
You get to keep the title to your property and stay in a familiar place.
you’re free to use proceeds from the loan to pay for home improvements and other needs.
The home loan balance isnt due until you move out, sell the property or pass away.
The Internal Revenue Service (IRS) doesnt consider money from a reverse mortgage income.
Instead, its categorized as a loan advance, which means you receive the money tax-free.
This categorization is unlike other retirement income, such as distributions from a401(k) or IRA.
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Those seniors were often referred to as house-rich and cash-poor.
Reverse mortgages can also help pay off debts.
Reverse mortgages arent a perfect solution for retirement money problems, though.
Its possible to default on the loan and lose your home to foreclosure if you dont meet certain requirements.
The last option lets you tap reverse mortgage funds when you need them.
This kind of reverse mortgage tends to offer lower fees and interest rates.
For example, you may only be able to tap funds for home improvements or pay property taxes.
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Its critical to understand the disadvantages of reverse mortgages before you enter into an agreement with a lender.
Youll need to maintain homeowners insurance, taxes and HOA fees.
Youll also face origination fees when you sign up for a reverse mortgage.
Origination fees are capped at $6,000 and vary based on your loan amount.
Aside from these upfront costs, there are also ongoing expenses added to your loan balance each month.
Those expenses may include yearly mortgage insurance premiums equal to 0.5% of the outstanding mortgage balance.
These insurance premiums are charged by the lender and are paid to the Federal Housing Administration (FHA).
Mortgage insurance premiums are paid in addition to your homeowners insurance.
Reverse mortgage lenders can foreclose on your home for several reasons.
The same applies if you leave the property for more than a year.
Non-borrowing spouses can remain in the home following the death of a reverse mortgage holder.
So can a surviving borrower listed on loan documents.
A reverse mortgage can impact your eligibility for government need-based programs.
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