Last Updated on May 22, 2023 by Lily Connel
A reverse mortgage, or home equity conversion mortgage (HECM), offers several benefits. It provides seniors with a means to access their home equity as a source of supplemental income. It enables them to remain in their homes and eliminates monthly mortgage payments. Reverse mortgages are flexible, allowing homeowners to choose from various payment options. However, there are downsides to consider. The fees associated with reverse mortgages can be high, including closing costs and mortgage insurance premiums. Accumulated interest over time can significantly reduce the equity left in the home.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows homeowners aged 62 and above to convert their home equity into cash. It is called a “reverse” mortgage because instead of making monthly payments to the lender, the borrower receives payments from the lender. The loan, interest, and fees are repaid when the homeowner or their heirs sell the house, move out, or pass away. The most common type of reverse mortgage is the Home Equity Conversion Mortgage (HECM), which is backed by the Federal Housing Administration (FHA).
To be eligible for an HECM, the homeowner must own the home outright or have paid down a significant amount of the mortgage. They must also be current on property taxes, insurance, and any association fees. An approved HECM counselor must conduct an information session before the loan is approved. While a reverse mortgage can provide financial relief for homeowners, it is important to consider the potential downsides before deciding if it is the right option.
Eligibility Criteria and Requirements of Reverse Mortgage
Eligibility criteria and requirements for a reverse mortgage include:
- Age Requirement: Generally, the homeowner must be at least 62 years old.
- Homeownership: The individual must own the home and use it as their primary residence.
- Property Type: Eligible properties include single-family homes, multi-unit properties (up to four units), approved condominiums, and certain manufactured homes.
- Equity: The homeowner should have a significant amount of equity in the property, typically at least 50%.
- Financial Assessment: Lenders may evaluate the homeowner’s income, creditworthiness, and ability to pay property taxes and insurance.
- Counseling: Before obtaining a reverse mortgage, homeowners are required to attend counseling with a HUD-approved counselor to understand the loan terms, costs, and alternatives.
- Repayment: The loan is typically repaid when the homeowner sells the property, moves out, or passes away. The loan balance, including accumulated interest and fees, is usually paid from the sale proceeds.
It’s important to note that these eligibility criteria and requirements may vary depending on the specific reverse mortgage program and lender.
Types of Reverse Mortgages
Reverse mortgages are a type of loan that allow homeowners aged 62 and over to borrow against their home equity, without having to make monthly payments. There are different types of reverse mortgages, each with their own pros and cons. Here are the most common types of reverse mortgages:
- The Home Equity Conversion Mortgage (HECM) is the most common type of reverse mortgage and is backed by the Federal Housing Administration (FHA). Borrowers can receive their loan in a lump sum, line of credit, or monthly payments. HECMs generally have lower interest rates than other types of reverse mortgages.
- The Proprietary Reverse Mortgage is a type of reverse mortgage offered by private lenders. These loans are not backed by the government, so interest rates may be higher. However, borrowers may be able to access more of their home equity with a proprietary reverse mortgage.
- Single-Purpose Reverse Mortgages are typically offered by state or local government agencies or non-profit organizations. These loans are designed for specific purposes, such as home repairs or property taxes. Interest rates on single-purpose reverse mortgages tend to be lower than other types of reverse mortgages.
Regardless of the type of reverse mortgage, there are pros and cons to consider. One advantage of a reverse mortgage is that it can provide an additional income stream for seniors who are short on funds. However, reverse mortgages can also be expensive, and borrowers must be careful to understand the loan terms to avoid potential pitfalls. Additionally, if the borrower moves or passes away, the loan must be repaid. It’s important to consider all of the pros and cons before deciding if a reverse mortgage is right for you. [5][6]
Pros of Reverse Mortgages
Reverse mortgages can be a helpful financial tool for retirees who want to access the equity in their homes. Here are some of the benefits of getting a reverse mortgage.
- First, reverse mortgages are ideal for people who have a lot of wealth tied up in their homes but may not have much cash savings or investments. By getting a reverse mortgage, they can turn their home equity into cash that they can use to cover expenses in retirement.
- Another advantage is that you can stay in your home even after getting a reverse mortgage. This can provide peace of mind for people who don’t want to move and may not have other options for generating income in retirement.
- Additionally, getting a reverse mortgage can help you pay off your existing home loan. This can free up money that you would otherwise be using to make mortgage payments each month.
- Another pro of reverse mortgages is that you have flexibility in how you receive the money. You can choose to receive a lump sum, monthly payments, a line of credit, or a combination of these options. This can give you more control over your finances and help you meet your specific needs.
- Finally, reverse mortgages are non-recourse loans, which means that the borrower or their heirs will not have to pay back more than the value of the home. In other words, if the value of the loan exceeds the value of the home, the lender cannot come after you or your heirs for the difference.
Cons of Reverse Mortgages
A reverse mortgage may sound like a good idea for seniors looking to have more financial freedom, but it’s important to understand the cons as well as the pros. Here are some cons to consider:
- First, a reverse mortgage may mean less inheritance for your heirs. Since the loan is paid back from the sale of the home after death, your heirs may be left with less equity in the property.
- Second, a reverse mortgage may come with high upfront costs. These include insurance premiums, origination fees, and closing costs. These costs may be added to the balance of the loan and increase the amount owed over time.
- Third, a reverse mortgage may limit your options for moving. If you decide to sell your home or move out, the loan will become due immediately. This can limit your options and may make it more difficult to move if needed.
- Fourth, a reverse mortgage may reduce your eligibility for other programs. Since the money from the loan is considered income, it may reduce your eligibility for government programs like Medicaid.
- Lastly, a reverse mortgage may be more expensive than other types of loans. The interest rate on a reverse mortgage can be higher than on a traditional mortgage, and the fees can add up quickly.
Conclusion
After considering the pros and cons of a reverse mortgage, it is clear that this mortgage product is not suitable for everyone. While it can provide much-needed funds for seniors who are short on cash, it can also be expensive, and the loan terms can put the homeowner, spouse, and heirs at risk.
It is important to remember that a reverse mortgage should only be considered as a long-term financial stability tool in retirement. Seniors who understand how these loans work and have a plan for how they will use their equity can benefit from taking out a reverse mortgage.
References:
https://www.forbes.com/advisor/mortgages/reverse-mortgage-pros-cons/
https://www.businessinsider.com/personal-finance/reverse-mortgage-pros-and-cons
