What is a reverse mortgage and how do they work?
A reverse mortgages is available to homeowners age 62 and older to borrow against their home’s equity without having to make monthly mortgage payments. Borrowers can choose to take funds in a lump sum, line of credit or through structured monthly payments.
The borrower, or their estate, pays off the principal borrowed and the accrued interest all at once at the end of the loan.
The repayment of the loan is required when the last surviving borrower vacates the home permanently. Any remaining equity belongs to the borrower’s heirs
How is a reverse mortgage different from a traditional mortgage?
Think of a reverse loan as moving in the opposite – or reverse — direction of a traditional or “forward” mortgage.
The traditional loan is a situation of falling debt and rising equity. The reverse mortgage is a situation of falling equity and rising debt.
With the reverse mortgage, as the borrower draws out funds and as interest accrues on the loan, the balance grows and the borrower’s equity position in the property becomes smaller.
When Does it Make Sense to Consider a Reverse Mortgage?
This type of mortgage can help with expenses and home repairs when the borrower is living on a fixed income, helping homeowners to age in place.
A reverse mortgage can be a sensible option for seniors with sufficient income to cover basic expenses, including property taxes and insurance, who want to live comfortably in their home as they age in place.
What Are Some Potential Drawbacks with a Reverse Mortgage?
Reverse mortgages typically carry higher fees and can be costly because of origination fees, servicing fees, and third-party closing charges such as an appraisal, title search, and recording costs. Borrowers must pay an upfront mortgage insurance premium. Borrowers should maintain a sound financial plan and prepare for these fees.
Additionally, many borrowers are used to having their insurance and property taxes paid for in escrow as part of their mortgage payment. When they switch to a reverse mortgage, they are no longer making a mortgage payment, but are still responsible for paying property taxes and insurances. That’s something to remember. Because these large bills come due only a couple of times a year, it is important to set calendar reminders and plan ahead.
What Should Seniors Keep in Mind if Considering a Reverse Mortgage?
Seniors considering a reverse mortgage are wise to keep in mind the impact on monthly budgets.
With a reverse mortgage, the borrower is still responsible for the upkeep, taxes and insurance on the home. If income changes, it’s important to know how to adjust to the situation and look for resources to help.
Is Reverse Mortgage Counseling Required?
The federal government requires that borrower’s participate in a reverse mortgage counseling session with an approved non-profit agency. Our counselors are certified and can provide reverse mortgage counseling over the phone. Counseling sessions help seniors understand their options to feel confident and make an informed decision. We can also assist those who already have a reverse mortgage and are having trouble paying property taxes or insurance.
Once borrowers complete a counseling session, they receive a certificate that lenders require as part of the loan application.
Consider all options before securing a reverse mortgage. While a reverse mortgage could make sense, there may be other options.
For seniors considering this option, don’t go it alone. Reach out for a no-cost financial assessment to ensure you can age in place exactly where you wish.
Your counseling session will help you understand how reverse mortgages work, including payout options, homeowner costs, tax implications, and other benefits and drawbacks.