Those of us grandparents that are about to retire are all looking for ways to increase our bottom line. One item that has come to my own mind is to get a reverse mortgage. Should I get a reverse mortgage? I had seen the ads on TV, and it all sounds wonderful. But I wanted to be sure, so I did some research. Here’s what I found.
What is a Reverse Mortgage?
A reverse mortgage converts equity in your home into cash. You can receive a large sum all at once, establish a line of credit to draw on as you please, or get paid in monthly installments. If you wish you can pay it back the same as you would any loan. And if you have chosen monthly disbursements, you could continue to collect those for the rest of your life (as long as you’re in your home).
What Are The Rules?
- You must be age 62 or older, and own most of your primary residence (the home you live in).
- If you have an outstanding mortgage on the house, it should be a smaller amount relative to the home’s value (less than 50%).
- You do not have to have a good credit score or have an income to qualify for a reverse mortgage.
- Your credit score does not affect the interest rate on the loan.
- You will still be required to pay property tax and insurance.
- You will be required to maintain the home, for which you will not be reimbursed.
- You can’t get a reverse mortgage if you home is part of a coop, because, technically, you don’t own the property that the home sits on.
- Lenders can’t go after borrowers or their heirs if the home turns out to be underwater when it’s time to sell.
- Lenders must allow any heirs several months to decide whether they want to repay the reverse mortgage or allow the lender to sell the home to pay off the loan.
- HUD requires that prospective reverse mortgage applicants participate in a counseling session that lays out the rules of the reverse mortgage. In this 90 minute session, the homeowners speak to a HUD representative about their specific home and specific needs to help the homeowners make the best decision for their retirement.
- If you have to leave the home for more than a year, even if it is for long term medical care, you are required to pay the loan back. This is usually accomplished by selling the home.
Types of Reverse Mortgages
There are three types of reverse mortgages.
- The most common is the home equity conversion mortgage or HECM. HECMs are federally-insured reverse mortgages and are backed by the U. S. Department of Housing and Urban Development (HUD). HECM loans can be used for any purpose.
- Single-purpose reverse mortgages are the least expensive option. They are not available everywhere, so check with your lender if you want a single-purpose reverse mortgage. The money you receive from this type of mortgage can only be used for a designated purpose, such as home repairs, property taxes, etc. The lender will specify what the money can be used for.
- Proprietary reverse mortgages are for homes with value greater than $679,650, and can be used for any purpose.
When you take out a reverse mortgage, you can choose to receive the proceeds in one of six ways:
Lump sum: If you want to get all your equity money at once, and want a fixed interest rate, you will want to take your money in one lump sum. All other types of payouts are variable interest, because you will be borrowing the money over time, and the rate will definitely vary through the course of the mortgage.
Equal monthly payments: The lender will pay you equal monthly payments for as long as one borrower lives in the home. If there is a still a balance in equity left after the last homeowner passes away, the leftover money goes to the homeowner’s estate.
Line of credit: This method is exactly how it sounds. The money is available whenever the homeowner needs it, and can write a check or run a card when they want to use the money. They only pay interest on the portion they take from the account. As with the monthly payout above, if there is equity left, the balance goes to the estate.
Equal monthly payments plus a line of credit: A combo of the two.
Term payments plus a line of credit: This is where there is a term agreed upon, such as 10 or twenty years, instead of the mortgage terminating when the last homeowner has passed away. This is generally done with smaller equity values.
-For most retirees, their home is the most significant investment they own. With a reverse mortgage, once you are 62 or older, you can use the equity in your home to live on. but still live in your home, as long as you don’t have to move into a nursing facility for more than a year.
-If for some reason your family doesn’t want to keep the house in the family, having the home go automatically to the bank once the last homeowner passes away, is a convenient way to let the house go. The homeowner’s children do not have to go through the hassle of selling the house once the owners are gone.
-With a reverse mortgage, you spend a significant amount of your saved equity on interest payments to the reverse mortgage lender. There are also fees: loan origination fee, first month of insurance, etc.
-You run into a big problem if you outlive the term of the loan. You run out of money, just when you need it.
-If you have a friend or relative living with you in the home, they have no rights to stay in the property once you pass away.
-You can’t pass the home on to your relatives, unless they buy it from the bank.
-A reverse mortgage may affect your Social Security and/or your Medicare eligibility. It’s best to consult an accountant to see if a reverse mortgage would be an asset or a liability once you go into retirement.
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So, Should I Get a Reverse Mortgage?
It is up to each individual or couple to make the decision about getting a reverse mortgage. It looks like I won’t be getting one. I will not have enough equity in my home when the time comes. It would be better to sell my home outright and get a smaller, less expensive home. But this doesn’t mean it’s not the best deal for YOU. Visit with your retirement planner or accountant and see what is your best option.
Thank you for reading, and please leave your comments and questions below!