A Home Equity Conversion Mortgage (HECM), the most common type of reverse mortgage, is a special type of home loan only for homeowners who are 62 and older.
A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money using their home as security for the loan. Also like a traditional mortgage, when you take out a reverse mortgage loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don’t make monthly mortgage payments. The loan is repaid when the borrower no longer lives in the home. Interest and fees are added to the loan balance each month and the balance grows. With a reverse mortgage loan, homeowners are required to pay property taxes and homeowners insurance, use the property as their principal residence, and keep their house in good condition.
With a reverse mortgage loan, the amount the homeowner owes to the lender goes up–not down–over time. This is because interest and fees are added to the loan balance each month. As your loan balance increases, your home equity decreases.
A reverse mortgage loan is not free money. It is a loan where borrowed money + interest + fees each month = rising loan balance. The homeowners or their heirs will eventually have to pay back the loan, usually by selling the home.
Pros and Cons of Having a Reverse Mortgage
If your biggest asset is your home equity once you are 62 years of age and above, a reverse mortgage is an excellent way to get cash. You can continue occupying your home so long as you are able to keep up with maintenance, insurance, and property taxes and don’t have to move into an assisted living facility or a nursing home for more than one year.
Nonetheless, a reverse mortgage translates to spending a good chunk of the accumulated equity on loans fees and interest, which we will cover below. You also likely won’t have the ability to pass your home to your heirs. If getting a reverse mortgage isn’t providing a long-term financial solution, just a short-term solution, it could not be worth it.
What if you live with your friend, roommate or relative? That person has no right to continue occupying the home after you pass on if you take a reverse mortgage.
Outliving mortgage proceeds is a problem some borrows face with reverse mortgages. If you select provide lifetime income, including a term plan or lump sum or you go for line of credit and utilize it all, you could be broke when you urgently need it.
Is a Reverse Mortgage Beneficial?
A reverse mortgage sounds similar to a line of credit or home equity loan. Indeed like these loans, reverse mortgages provide a line of credit or a lump sum which you can access if need be depending on the amount you’ve paid off for your home and its market value. Different than a line of credit or a home equity loan, the borrower does not need good credit or an income to qualify or make loan payments while occupying the home as the primary residence.
The only way you can access home equity and not sell the home is through reverse mortgage for seniors who want to avoid the responsibility of paying monthly installments or those who don’t qualify for a refinance or home equity loan due to poor credit or limited cash flow.
What are your options for utilizing home equity for your retirement funding if you don’t meet the qualifications for any of the loans? You can downsize or sell, or even sell to your kids or grandkids to keep your home in the family. You could also consider renting from them if you wish to continue residing in the home.
Interest Rates when it comes to Reverse Mortgages
All types of reverse mortgages apart from, the lump-sum which give the borrower all proceeds at a go, have variant interest rates. These interest rates change constantly and are linked to the London Interbank Offered Rate (LIBOR).
Additionally, the lender increases the margin by three or two percentage points. If LIBOR is 2%, and the lender is 1.8%, your rate will be 3.8%.
Watch out for scams related to reverse mortgages!
Beware of contractors who approach you about getting a reverse mortgage loan to pay for repairs to your homes. It may be a scam. Don’t let yourself be pressured into getting a reverse mortgage loan.
Scams targeting veterans
The Department of Veterans Affairs (VA) does not offer any reverse mortgage loans. Some mortgage ads falsely promise veterans special deals, imply VA approval, or offer a “no-payment” reverse mortgage loan to attract older Americans desperate to stay in their homes.
You have a three-day right to cancel a reverse mortgage
With most reverse mortgages, you have three business days after the loan closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.” To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt so that you have documentation of when you sent and when the lender received your cancellation notice. Keep copies of any communications between you and your lender. After you cancel, the lender has 20 days to return any money you’ve paid for the financing of the reverse mortgage loan. If you believe there is a reason to cancel the loan after the three-day period, seek legal help to see if you have the right to cancel.
Note: This information only applies to Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage loans.