The Pros and Cons of Reverse Mortgages

Are reverse mortgages a good idea for retired military members? Just like a driver would use caution when reversing a vehicle, so must a home owner exercise extreme care when deciding whether or not to take on a reverse mortgage.  Review these pros and cons of reverse mortgages before making this life-altering decision.

Reverse mortgages have become very popular as aging Baby Boomers (homeowners) move into retirement, and discover they don’t have enough money for living expenses.  But these folks do have a home, with lots of equity. So, many take the reverse mortgage route to improve their cash position.  For some this may be the perfect solution; for others it could be a disastrous decision.

Reverse mortgages (loans) are simply the opposite of “forward” loans.  In forward loans, payments are made to a vendor, leading to a decrease in debt, and an increase in equity.  With a reverse mortgage, NO payments are made to a lender, leading to an increase in debt, and a decrease in equity.  In a reverse mortgage, payments are made to the borrower instead; payment amounts are based upon the borrower’s age, home equity, and interest rate.

To be eligible for a reverse loan in North America, an applicant must be 62 years of age or older; he or she must be a home owner; the home must be the applicant’s principle residence; the owner must remain living in the home.  There are other considerations, but these are the most important.

WHEN IS A REVERSE MORTGAGE A GOOD IDEA? 

The retired person who is facing large bills, like medical bills, and who is short on cash, may find the reserve mortgage a godsend.  In this person’s case, they need some fast cash, and a home equity loan is not a reasonable option because their income is fixed; they cannot afford monthly loan payments. Regular payments from a reverse mortgage could be the perfect answer in this situation.

Then there is the person who, for whatever reason, including emotional reasons, refuses to sell their home and relocate to another residence.  An outright sale of their home is out of the question; a reverse mortgage may be the only solution.

What of the man or woman who owns a home that has been in the family for many generations?  Selling off this family treasure would bring grief and discord; a reverse mortgage may be just the answer.  True, the home’s equity will be devalued, but the home will remain in the owner’s possession until death. 

THE DOWNSIDES OF A REVERSE MORTGAGE:

Fees, expensive fees, are perhaps the biggest drawback of a reverse mortgage.  The fees to set up a reverse mortgage can be as high as 6% of the home’s value.  Experts say the very old and frail (those with a shorter life expectancy) should not take on a reverse mortgage; there is no chance to amortize the costly set-up fees.

If you are new to the idea of reverse mortgages, remember this type of loan is still a loan, complete with interest charges.  The mortgage may be drawing on your homeowner’s equity, but the money is coming from a lender; interest will be charged and this accrued interest will regularly reduce your equity. 

Both yearly and monthly adjustable interest rates are available; however, the monthly rate can vary up to 10% over the life of a reverse mortgage, while yearly rate increases cannot exceed 5%.

Many factors, changeable factors, can come into play over the life of a reverse mortgage.  Interest rates can rise, the home’s value can go down, the home owner could be taken sick, or could die.  Consider these possible events before making your decision for a reverse mortgage.

MORE DECISIONS:

You’ve made the decision to take on a reverse mortgage, but you’re not finished yet.  How do you want the monies paid out?  Lump sum?  Line of credit?  Monthly payments? 

And what type of reverse mortgage do you want?  Federally insured Home Equity Conversion Mortgage (HECM)?  CHIP reverse mortgage, Canadian Home Income Plan?   A Fannie Mae Home Keeper’s loan?

Talk to a counselor first; only a good financial housing counselor will be able to assist you in making the best decision about your reverse mortgage, relative to your personal situation and home ownership profile.

USING A REVERSE MORTGAGE TO FUND AN INVESTMENT?

Someone comes along with this great deal, like an annuity insurance agent, and wants you to invest using a reverse mortgage.  Should you do it?  Experts say, “No.”  They warn that these types of investments are highly suspicious, and very dangerous. 

A homeowner is advised to weigh the cost of any investment purchased by a reverse mortgage: the mortgage fees, the interest, and the loss of equity as interest accrues over time.  A closer look might reveal that the investment is far from sound, and should be avoided at all costs.

THINK IT OVER:

Your home is a terrific asset; don’t give up your equity in this asset lightly.  Before signing, be sure you understand, completely, all the conditions of your reverse mortgage. You might be surprised at how many conditions exist (like failure to maintain the property), and what actions might define a reverse mortgage as due and payable.

Remember, there are many pros and cons of reverse mortgages; an in-depth conversation with a trusted counselor will help you examine your options before you make this serious decision. 

The Requirements of Reverse Mortgages

• You must be at least 62 years old.

• You must pay your existing credit with your personal money or any proceeds from your approved RM. 

• You must undergo an approved HUD counseling. The counseling is needed for the client to fully understand the reverse mortgage.

• Your home should be your main residence. You must be residing there for more than 6 months.

The sum of money you can acquire from reverse mortgage will depend on the value of the home (appraised by FHA), the initial interest rate, the location of your house and your age. You can receive your cash in different ways you prefer. The money you will receive will not affect your Medicare and Social Security benefits; and the amount is tax free.      

Your mortgage will end when you sell the house, when you move to other house or if you will die. The remaining mortgage can then be paid by the proceeds upon selling the house. If the proceeds are larger than the outstanding balance, the next owner of the house or your heirs (if there’s any) will receive the money. Another payment option is for your heirs to refinance the estate. If the proceeds are still not enough, the bank’s insurance will make up for the difference.   

Reverse mortgages clearly add comfort to any homeowners; seniors are specifically benefited by RM. Here are the numerous advantages you can gain from these mortgages:

1. If you are 62 years old or older, you can easily live in a house. If you have a pressing need for money, you can also use the house as a source of income --- absolutely TAX FREE!

2. Reverse Mortgage can be an elastic financial planning product. There are only few limitations and you don’t need to meet any income qualifications. 

3. You can receive the cash amount in any of the ways you want; be it on lump sum, a line of credit, monthly or the combination of these three ways. There are no restrictions on how you will use the money you will receive. You can travel; use it to pay for your insurance, your children’s plans, etc.

4. With other home loans, if you failed to pay for months, your home can be taken from you, with RM, you don’t have to repay monthly. There are no risks when you have payment defaults thus you are secured with a home. 

5. The Reverse Mortgages are federally insured; thus you can still receive payments even if you fail to repay your loan.

6. Reverse mortgage can be described in a situation wherein your debt falls while your equity rises. This is because whenever you pay at regular intervals, your debt decreases but the value of your home ownership increases. 

7. There is a guaranteed monthly income and a credit line which can increase until you have consumed all.

8. The value of your home debt is equivalent to the value of your house and will not increase no matter what happened to the house and for how long you will reside there. 

9. You can live in the house for as long as you desire and you retain your ownership. You can also pass the house to other members of the family as long as they are able to pay.  

10. There is no limit in the amount of loan. Seniors who have huge amount of home equity can be given products at no loan amount limit. 

With all the advantages and disadvantages of reverse mortgages, it will be up to you on whether you feel it is right to acquire one. It will always boil down to your need for money whether for the purpose of increasing your cash reserves, making investments, repairing your homes or improving your life in general. Evaluating your present status will be useful in deciding. It is apt to question yourself on some essentials such as how much money should you obtain, where and when should you use the cash and would it really be beneficial?