If you’re a homeowner nearing retirement age, you might have heard about options for extra cash associated with your home. One of these options is a reverse mortgage, which is often very appealing to homeowners with their net worth tied up in their homes.
Although there are many benefits to a reverse mortgage, there are a few downsides too. If you’re considering this type of loan, this blog post gives you the details you need to know before going any further.
A reverse mortgage is available to property owners age 62 or older. It allows the homeowner to borrow against their equity to receive cash or a line of credit from a lender.
Unlike a regular mortgage, the borrower isn’t required to make monthly loan payments. Instead, the loan is repaid when:
However, the loan can be repaid in full at any time without a prepayment penalty if the homeowner wishes to do so.
Among the three types of reverse mortgages, the Home Equity Conversion Mortgage (HECM) accounts for the majority. Backed by the Federal Housing Authority (FHA), a HECM requires borrowers to pay an FHA insurance premium out of the loan proceeds, which allows them to secure the loan.
To qualify, the borrower must meet the following requirements:
To this last point, the borrower might receive a fully funded Life Expectancy Set Aside as part of the loan, which is the amount withheld from the total available reverse mortgage proceeds used to pay for property and insurance charges during the estimated life of the loan.
The primary benefit of a reverse mortgage is the comfort it can provide, both in terms of finances and peace of mind:
Through monthly payments, a line of credit, or a lump sum payment, the borrower can receive funds against their home to pay for everyday expenses, such as utility bills, or eliminate other outstanding debt. Plus, the funds received are not taxable.
No longer paying for mortgage payments releases the borrower from a hefty expense every month. Keep in mind that taxes and insurance related to the home are still the borrower’s responsibilities.
For example, if the balance of the loan on the house is $200,000 at the time of a maturity event, and the appraisal is $150,000, the borrower only needs to pay back $150,000 once the loan is due. The remaining balance is covered by the government out of the FHA Mutual Mortgage Insurance Fund (MMIF).
This is highly beneficial to the borrowers or their heirs, as they will not need to pay out the difference of the depreciation.
As long as the borrower can keep up their end of the bargain (paying taxes and homeowner’s insurance on time) and no maturity event takes place, the borrower can age in place.
Remember that the funds received from a reverse mortgage aren’t “free” money. In fact, the loan interest increases over time, so it’s important to consider several factors before making your decision:
With a reverse mortgage, it might seem as though the borrower is no longer responsible for house payments, but they will still have quite a few expenses to take care of, including:
If these expenses aren’t taken care of, it could lead to foreclosure on the house.
If the borrower passes away and the heirs inherit the home, they are required to pay the full loan balance if they wish to keep the home. They could also sell the home for 95 percent of its appraised value if the loan balance exceeds the home value. They would get 5 percent of the proceeds from the home sale.
The remainder would pay off the loan balance, and the deficit of the remaining loan balance would be covered by the MMIF. If the home is worth more than the loan balance, the net proceeds would pay the loan balance in full first, and then the heirs would get the remaining proceeds. This might mean the children may inherit less from the home, depending on the situation.
In some cases, the home will need to be turned over to the lender to satisfy the debt.
In certain scenarios, such as if the borrower moves or is unable to pay taxes or insurance on time, the payback time frame may shorten to six months, which could lead to a foreclosure if a payback is not possible.
Although the process is fairly straightforward, it can be difficult for borrowers, their family members, and their advisors to understand. This process requires a trustworthy lender to guide the borrower and help them make the right decision.
Like other mortgages, a reverse mortgage is only beneficial based on an individual’s financial situation and lifestyle.
By working with a Loan Officer from radius, you can have your questions answered and concerns addressed. We’ll also look at all the necessary documentation to help determine if a reverse mortgage is the right choice for you. Connect with a Loan Officer today.
* This guide is for educational purposes only and should not be construed as financial advice. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Not tax advice, consult a tax professional. The borrower must meet all loan obligations, including living in the property as the principal residence and paying property charges, including property taxes, fees, and insurance. The borrower must maintain the home. When the last borrower or eligible non-borrowing spouse passes away, sells the home, permanently moves out, or fails to comply with the loan terms, the loan becomes due and payable (and the property may become subject to foreclosure). Reverse mortgages are currently not available in NH and TN with radius financial group, inc.