Should You Consider a Reverse Mortgage?
With pension plans disappearing, investment portfolios down, prices for food, energy, and health care on the rise, and Social Security in danger, a common question we get is whether reverse mortgages are a good idea. If you’re not familiar with them, they’re basically what they sound like. Instead of you paying the mortgage company, the mortgage company pays you. You can use the money to pay off your existing mortgage balance, supplement your retirement income over your lifetime, or cover a big expense. Since it’s a loan, the payments aren’t taxable but there are no credit or income requirements and you don’t have to pay back the loan as long as you live in your home.
Here are some questions to consider in deciding whether a reverse mortgage makes sense for you:
1) Are you eligible? You need to be at least 62 years old, live in the home as a primary residence, and be one of the lucky few who still has some equity in their home. The amount you would get depends on your age, the appraised value of your home, the current interest rates, and how you take the payment. There are also additional requirements to qualify for a federally insured reverse mortgage through FHA’s Home Equity Conversion Mortgage (HECM) program. You can see what federally insured reverse mortgages you may qualify for with this calculator. (If you want to borrow more than the $625,500 national limit set by HUD, you’ll have to take a jumbo loan that isn’t insured by the FHA and may have higher fees.)
2) How much does it cost? Many people who take reverse mortgages have no idea because the terms can be so complex and difficult to understand. But when you add up mortgage insurance, an origination fee, title insurance, a real estate appraisal, recording fees, a survey, and monthly service fees, reverse mortgages can be quite expensive. That also doesn’t include the interest, which is usually based on a variable rate and compounds faster since you’re not making payments on the loan. Keep in mind that failing to keep up with property taxes and homeowner’s insurance could result in a default on the mortgage.
3) Do you think you might want to move out of your home someday? Since you’ll have to pay off the loan balance when you move out for more than 12 consecutive months, you could feel stuck in a place you no longer want to be in. This could be an issue if you plan to move into an assisted living facility or in with relatives.
4) How important is leaving your home to your heirs? After you pass away, the mortgage company will try to collect as much of the loan balance from the equity in your home as they can so your heirs shouldn’t count on it. It’s possible that your loan balance could be more that your house if worth. But don’t worry, they cannot collect any more than the value of the house regardless of how much you owe.
5) What other options are available to you? For example, you could sell your home to a family member or downsize. Downsizing can bring additional benefits in the form of lower property taxes, homeowners’ insurance premiums, and utility bills. Other options to access the equity in your home are with a home equity loan or line of credit, which both tend to have much lower upfront costs. However, you must meet income and credit standards to qualify, the interest rates tend to be slightly higher than with a reverse mortgage, and you have to start making payments right away. Plus Home Equity loans may be limited to 75% to 80% of the value of your home which may limit the amount of funds that you have access to. Plus qualifying for one may be difficult if you have limited income, assets or poor credit.
The decision of whether to take a reverse mortgage on what may be your most valuable asset shouldn’t be taken lightly. You might want to consult an accountant or financial planner to help you with the decision.
