If you’re an older homeowner with plenty of accumulated home equity and want to find an easy way to supplement your income, a reverse mortgage may be your best financial option.
However, even for people with tons of financial experience, understanding exactly what a reverse mortgage is can be a challenge. But, because it has gained so much interest in recent years (and with the new abundance of retirees seeking exactly what the loan option offers), grasping the concept and putting it to use could be a great help to your finances.
For some people, though, it may be wise to avoid using a reverse mortgage as part of a retirement plan altogether.
So, which camp do you fall in? To find out, check out this helpful advice on whether or not you should seek a reverse mortgage.
What is a Reverse Mortgage?
Simply put, a reverse mortgage is a loan for homeowners over 62 years of age that allows you to convert some of your home equity into cash. It was first designed as a way to help retirees use their accumulated wealth to cover their living expenses and pay for health care, especially for those on a limited income.
The reason why it’s actually called a reverse mortgage is also pretty simple. While a regular mortgage requires you to make monthly payments to your lender, a reverse mortgage has the lender making monthly payments to you based on the value of your home and the age you are when you qualify. The National Council on Aging provides a helpful reverse mortgage calculator, as well as other resources.
This is helpful for some key reasons – mostly related to the sorry state of retirees in our current economy.
Since 2011, the United States has seen record low numbers of workers confident that they’ll have enough money to retire comfortably. Only 13 percent of workers surveyed by the Employee Benefit Research Institute claim to be very confident, with 38 percent claiming to be somewhat confident.
The rest range from not really confident, to not confident in the slightest. That’s where the reverse mortgage comes in.
Through a reverse mortgage, you can use your home as your principal or even use the loan to purchase a primary residence if you can use cash on hand to pay the difference between the mortgage proceeds and the sales price plus the closing costs on the new property.
Conveniently, you don’t have to pay back the loan until you sell the house, move somewhere else, or die. As long as you’re alive and residing in the home, you aren’t required to make any monthly payments towards the loan balance.
Sound appealing? Let’s find out if you’ll qualify.
Who is Eligible for a Reverse Mortgage?
While a reverse mortgage might sound great to someone in their 30s or 40s who is just now getting into the home buying game, people in that group won’t qualify.
The requirements are pretty straightforward for eligibility:
- You must be at least 62 years of age.
- The home must be your primary residence.
- You must have paid off most if not all of your regular or traditional mortgage.
These mortgages are insured by the Federal Housing Administration (FHA) through their Home Equity Conversion Mortgage (HECM) program. Before you qualify, you’ll have to sit down with a reverse mortgage counselor and figure out how much it will cost you. Said counselor will also be seriously helpful in answering any of your lingering questions about how these loans work.
When You Should Not Seek a Reverse Mortgage
Even if you meet all of the requirements, the loan may not meet your needs, or may actually be detrimental to your financial health. These include reasons such as:
If you have heirs. If you die before paying off the loan, the house will be sold to cover the loan amount. In other words, anyone who you may have otherwise left the house to will have no rights to it.
If you are on a fixed income. If you bring in below $1000 a month, you might have to avoid a reverse mortgage. Paying for property taxes and homeowner’s insurance may leave you broke, and forced into facing foreclosure.
If you do not plan to live in the home for long. Ideally, you should be living in the house with no plans to leave in the foreseeable future. The idea makes the most sense if you’re at least planning on remaining in the house for 3 to 5 more years. If you’re going to move out in the near future, you’ll be confronted with paying off the full cost of the loan.
If you need to save your home equity for an emergency. When and how you tap into your home equity is a strategic decision. If you use it early and leave your retirement funds untouched, you may be able to extend the life of your assets.
If the fees are too high. Because a reverse mortgage is a loan, you can’t avoid loan-related fees. And, since the loan itself isn’t based on your income or your credit score, there are more risks taken by the lender, which means the fees will be substantially higher to offset the risks.
If you’re worried about repaying the loan. When you do move out, you’ll be required to repay your reverse mortgage. The only way to avoid this is to continue living in your primary residence. After a year of not living there, you’ll have to start paying. And, if you were already in a tight spot financially in the first place, this could prove extremely difficult.
If your spouse is opposed to the idea of living on in the house without you if you die. Before you seek out a reverse mortgage, have a conversation with your spouse or partner. If either of you will be co-borrowers, the one who survives will be able to live on in the house – if you aren’t co-borrowers, the survivor will have to repay the loan or take out their own mortgage to remain in the home.
All in all, reverse mortgages are a neat means of keeping yourself financially secure into your old age if you plan on sticking around in your primary residence. There are definitely circumstances where you shouldn’t consider it, but if those don’t apply to you, you may have just found your ticket to stability.
Again, these types of loans can be exceedingly complex and frustrating to wrap your head around. So, if you have any more questions concerning reverse mortgages (or any other thoughts you’d like addressed on housing in general), feel free to contact me today.
As a real estate agent covering the areas of Austin and Killeen, I have plenty of expertise when it comes to all things home-related. I’d love the chance to talk with you about your options for finding the perfect situation for you and your family.