For seniors who need income in retirement, or for those facing unexpected changes in finances, a reverse mortgage might seem like the way to go.
TV, radio and internet advertisements stress the attractiveness of reverse mortgages, promoted as a handy way to use home equity to free up funds. Retirees might be tempted to tap into the equity they’ve built up over many years of paying their mortgage.
The full story of reverse mortgages deserves a closer look – especially during a time of financial challenge for so many people.
Shared here are five facts about reverse mortgages for those considering this option.
Five Facts about Reverse Mortgages
1. Understand what a reverse mortgage is
A good place to start is with a definition. A reverse mortgage is an option available to homeowners age 62 and older to borrow against their home’s equity without having to make monthly mortgage payments. They can choose to take funds in a lump sum, line of credit or through structured monthly payments.
The repayment of the loan is required when the last surviving borrower vacates the home permanently. Any remaining equity belongs to their heirs.
2. Know how a reverse mortgage differs 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.
The reversal comes into play when considering that as payments are made on a traditional loan, the amount owed reduced and the equity in the property increases over time.
With the reverse mortgage, as funds are withdrawn and as interest accrues on the loan, the balance grows and equity in the property becomes smaller.
3. Review the pros and cons
A reverse mortgage can be sensible 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. 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.
One noteworthy drawback is that the loan balance increases over time as interest on the loan and fees accumulate. Over the months and years, fewer assets are available to leave to heirs if that is your end-of-life directive. If you decide to leave the home to heirs, they will be left with a loan balance to repay.
Another con – reverse mortgages also typically carry higher fees and costs associated with the loan compared to traditional mortgages.
4. Consider property taxes
When it comes to understand facts about reverse mortgages, there is a key issue to remember. 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.
Planning for these expenses will be important because these large bills come due only a couple of times a year. It is important to set calendar reminders and plan ahead.
Not paying these property charges is defaulting on the mortgage and can lead to foreclosure. As a HUD-approved housing counseling agency, we often work with clients facing this very situation. In many instances, by the time these individuals have reached out for help, they find they have fewer options available.
5. Think big picture, especially now
Seniors considering a reverse mortgage might want to consider the impact of any unexpected income changes. As noted above, upkeep, taxes and insurance are still needed for the home. If income changes, it’s important to know how to adjust to the situation and look for resources to help. Consider all options first. While a reverse mortgage could be right for you, there may be other options. Our housing counselors can help seniors think through alternatives like developing a solid budget or pursuing a debt management plan.
We are Here for You
For seniors considering this option, don’t go it alone. Let’s start a conversation exploring how you can ensure you can age in place exactly where you wish.
Knowing the facts about reverse mortgages is a good first step. We’ll explain how reverse mortgages work, including payout options, homeowner costs, tax implications, and other benefits and drawbacks.