Hey, Friends! Let’s talk mortgages today, shall we?
A few months ago, I shared some of my top tips to secure a home loan, and today I’d like to dig into a slightly different topic: reverse mortgages.
Huh? What the heck are reverse mortgages?
Great question. Let’s start with a broad overview…
Reverse mortgages are government-regulated home loans, and they’re available for older citizens (62+).
As Janet Berry-Johnson explains, “With a reverse mortgage, the lender pays you by taking some of your home’s equity and converting it into monthly payments to you. As long as you live, remain in your home, and continue to meet other obligations of the mortgage, you do not have to pay the money back.” In other words, if you are of retirement age, a reverse mortgage can help provide financial assistance or supplemental monthly income during your retirement.
Some reverse mortgages are offered by private reverse mortgage lenders, while others are provided by government programs like the FHA and HUD.
Are we good so far?
Great, then let’s dive into the specifics.
What Is A Reverse Mortgage and Should I Consider One?
Borrowing Against the Equity in Your Home
A reverse mortgage allows you to borrow against the equity in your home. Before you can do that, however, the home’s equity must be calculated.
What goes into this calculation, you ask? A couple things.
First of all, your equity depends on the current market value of your home. Secondly, any outstanding mortgage you have will be subtracted from the equity.
Once the actual equity is determined, the amount you can borrow is further reduced due to federal regulation. (Basically, those regulations state that only a portion of the equity can be turned into cash for spending during retirement.)
The Pros and Cons of a Reverse Mortgage
Reverse mortgages can be a great option for some, while others may find an alternative option that better suits their needs.
In an article from the Huffington Post, Jason Alderman offers a clear discussion of the pros and cons of a reverse mortgage, which provides a good starting point as you begin your research. Some of the highlights include:
1. A Regular Source of Income
As mentioned above, you can select your payment either in one large amount, or smaller regular payments. By having these different options, you can use the money to pay ongoing bills, create an emergency fund, or perform home maintenance.
2. Payments are generally tax free.
3. You increase your income without increasing monthly payments.
4. You won’t owe more than what your home is worth.
1. You might outlive your home’s equity.
As Alderman explains, reverse mortgages are “not a singular solution to spending problems. They’re recommended generally for older seniors as part of a strategic package of financial solutions to allow them to stay in their homes as long as possible.”
2. Your heirs can’t keep the house until you repay the loan.
(Of course, this is only a con if your children wish to inherit your home.)
3. Many reverse mortgages are adjustable rate.
This means that the cost of the loan can change over time.
4. If you have to leave your home for any reason, your loan is due.
(If you want to read a more detailed discussion about the pros and cons list, be sure to check out Alderman’s post here.)
Requirements to Get a Reverse Mortgage
The standards for a reverse mortgage include:
- You must be 62 years of age or older. (The same is true for your spouse if he or she cosigns the mortgage.)
- You must own the home and use it as your primary residence.
- If your credit isn’t in good standing, you might have some challenges getting a loan.
- You cannot have another home loan and a reverse mortgage simultaneously.
Things to Consider:
Mortgage loan officer Robin Faison offers three important questions for you to consider as you begin exploring the reverse mortgage option:
1. Do you want or need to move?
A reverse mortgage requires you to continue to reside in and maintain the home. If you are physically or financially unable to do that, you may have to sell the home to pay off the loan balance.
2. Can you afford to continue paying real estate taxes, homeowners insurance, association dues, and maintenance?
3. Are you planning on leaving your home to your children, grandchildren, or other heirs?
When you pass, your heirs may have to sell the home to pay off the reverse mortgage.
(Be sure to check out Faison’s thorough discussion of reverse mortgages here.)
The Bottom Line
Reverse mortgages are a great option for some, while others might benefit from an alternative resource. Make sure you do your research and talk with your financial advisor to ensure you’re doing what’s best for both you and your family.
Other great resources on reverse mortgages include:
Do you or anyone you know have a reverse mortgage? What tips do you have? Let me know below!