There is a lot of talk about reverse mortgages and I get asked all the time what is a reverse mortgage? Reverse mortgages have gained a lot of attention because they are “glamorized” as having many benefits to senior homeowner. So many retirees are left wondering “what is a reverse mortgage”?
As folks near retirement or are into their retirement years, funding their retirement is a huge concern. Large amounts of equity are tied up in many retirees homes. Leaving retirees wondering if they can pull equity out of their home to help subsidize their retirement.
Reverse mortgages are very complex and it is very easy to get lost in the details. In my experience, a reverse mortgage is a good idea for just a very few and are misused and misunderstood often. They are not a panacea for all your financial woes in retirement. But, they can be a worthy consideration for certain individuals.
While I am no expert on Reverse Mortgages, I need to know enough about them to help the over 55 clientele I serve to make upcoming financial decisions.
So What is a Reverse Mortgage?
A reverse mortgage is a mortgage product that was initially designed for lower income retirees to convert some of the equity in their home to cash. The extra cash will most likely be used to subsidize their retirement. Basically you are getting an advance on the equity in your home.
Unlike a traditional loan you never make a payment. It is a negative amortization loan as opposed to your conventional 30 year fixed. The interest is tacked on to the balance every month and the loan is payed back when the house is sold, you move out or upon death. Now wait I know that begs a lot of questions so wait hopefully I will address the big ones later in the article.
You keep the title to your home but you are obligated to maintain, pay taxes, etc… on your home.
Some Facts About Reverse Mortgages
- A reverse mortgage is for home owners that are 62 or older.
- You must own your home outright or pay off all other mortgages on your home from the proceeds of the reverse mortgage.
- Usually a reverse mortgage is a variable rate.
- You make no required payments towards the balance.
- The percentage of equity you can borrow against is determined by your age, the appraisal of your home, current interest rates, government opposed limits and the type of payout.
- You need to qualify and show you have the ability to pay taxes and maintenance.
- More money will be owed than you borrowed as a reverse mortgage is a negative amortization loan.
- The borrower and their spouse will stay in the house until death, the house is sold, or you move out.
- There are high fees and higher interest rates involved with a reverse mortgage.
- Most often your equity will be eaten up by the reverse mortgage an nothing will be left for heirs.
- If you have a FHA backed HECM (Home Equity Conversion Mortgage) even if there is more money owed than the home is worth other estate assets cannot be touched.
Payouts on a Reverse Mortgage
There are several different ways you can get paid out on a reverse mortgage.
- Lump sum up front. Generally this will be where you get the least amount of cash and because you are starting with a large balance interest climbs quickly.
- Line of credit you can draw on. Perfect if you just need a buffer for unforeseen repairs around the house or extra expenses.
- Monthly pay out term- for a certain period of time. Supplements your monthly income. Remember it will end at some point and leave you with whatever monthly income you had before the reverse mortgage.
- Monthly pay out tenure- for the rest of your life. Supplements your monthly income for life. Will probably be considerably less than the term monthly payout but is guaranteed for life.
- A combination of lump sum and monthly pay out.
How much money that could be made available to you depends on the age at which you apply and the equity in your home.
So the number 1 Big Question about Reverse Mortgages- What Happens If More Money is Owed Than The House is Worth
Most Reverse Mortgages are backed by the FHA under the HECM Program. If they are backed by the FHA they are federally insured and they are a non-recourse loan meaning the lender cannot recoup any losses from the estate. Any deficiency balance is covered by the FHA.
That is why age is important factor in how much they will let you borrow against your home. They have complex formulas to figure out life expectancy and how much equity you can borrow against.
Even if you took a lump sum or your monthly payments ended you will live (and possibly your spouse) in the house,payment free until you die, sell the house or move out.
Is a Reverse Mortgage Right for Me?
I can tell your for many I have met that are asking about Reverse Mortgages they are better off lowering their housing costs by downsizing and pocketing the excess equity in their home. A reverse mortgage comes with hefty fees and a higher interest rate.
Alternatively, maybe your house is in great shape, manageable and you couldn’t reduce costs much by downsizing. The extra cash that a reverse mortgage can provide, may make your house more livable as a senior or you can create a situation where a family member can move in and provide some basic care and help with expenses. Or, maybe you are living on a very low fixed income with no other alternatives and maybe several hundred dollars a month or even a $1000 or more could make things much easier.
The decision is very personal for the individual. The first question to ask is how important is it to stay in the home and is the home itself a financial drain on resources that are already in place?
If you plan on staying in your home for a long time and can manage the home, you have no other cheaper alternatives to access money and you realize the equity will most likely be used up in your home (nothing left for heirs) then maybe a home equity is right for you.
Remember a reverse mortgage is a negative amortization and equity will be eaten up quickly.
There is so much to think about. Explore all your options and make sure you know what you are getting into. Great resources are financial advisors, elder law attorneys and Senior Real Estate Specialists (real estate agents with specialized training).
Other Resources for What is a Reverse Mortgage?
- Bill Gassett, Realtor- Pros and Cons of a Reverse Mortgage
- Luke Skar, Mortgage Professional- FHA Reverse Mortgage Changes
- Debbie Drummond Realtor- Great Tips for Buying Your Retirement Home
- Administration of Housing and Urban Development- FAQ’s About HUD’s Reverse Mortgage
What is a Reverse Mortgage? is provided by Kevin Vitali- Massachusetts REALTOR. I have experience helping the over 55+ community with housing in their retirement years. If you would like to discuss your home during retirement and see if downsizing, upsizing or staying put is right for you call me at 978-360-0422.
Real Estate Services in the following areas: Northeast Massachusetts, Merrimack Valley, North Shore and Metrowest including the following communities and the surrounding areas, Amesbury, Andover, Billerica, Burlington, Chelmsford, Dracut, Groveland, Haverhill, Lowell, Melrose, Merrimac, Methuen, Middleton, North Andover, North Reading, Reading, Stoneham Tewksbury, Tyngsborough, Wakefield, Wilmington, Westford