In right situation, reverse mortgage worth consideration
On occasion I am questioned as to my personal opinion of reverse mortgages. As with most financial products, my opinion depends to a very large degree on the situation to which the financial product is being applied.
Reverse mortgages certainly have their place and in some situations they can be just what the doctor ordered. However, in general, I would consider them to be an option of last resort. That being said, for those in the right situation they are worth considering. To determine if a reverse mortgage is right for you it is helpful to have a basic understanding of what they are, how they work, and who qualifies for one.
The vast majority of reverse mortgages in the United States are written under the Federal Housing Administration’s program and are officially called Home Equity Conversion Mortgages (HECM’s). They are a special type of home loan that let you convert a portion of the equity in your home into cash. The equity that has built up over years of making mortgage payments can be paid to you. However, unlike a traditional home equity loan or second mortgage, HECM borrowers do not have to repay the HECM loan until the borrowers no longer use the home as their personal residence, die, or fail to meet the obligations of the mortgage (such as paying the property taxes, homeowner’s insurance, and completing necessary repairs).
Should any of these things occur the loan will become due. In most cases a reverse mortgage is paid off when the home is sold. It is important to note that reverse mortgages are designed so that the amount owed cannot exceed the value of the home. Therefore, if the home sells for less than the amount of the reverse mortgage balance, the borrower will not owe the difference. If, on the other hand, the home sells for more than the balance of the reverse mortgage, that equity belongs to the borrower or the borrower’s estate.
In order to qualify for a HECM, the FHA requires that you be a homeowner 62 years of age or older, own your home outright, or have a low mortgage balance that can be paid off at closing with the proceeds from the reverse mortgage, have the financial resources to pay the ongoing property costs, and you must live in the home. Unlike traditional mortgages, credit history and income level are not considered when qualifying for a reverse mortgage.
Homeowner’s interested in taking out a reverse mortgage are required to receive mandatory counseling by an independent third party, including an agency approved by the Department of Housing and Urban Development or a national counseling agency such as AARP. These organizations help homeowner’s review alternative options and to fully understand the type of transaction they are considering. Reverse mortgages offer a great deal of flexibility in how a borrower may receive their funds. There are four basic options: receive a lump sum of cash when the loan closes; receive a monthly annuity for as long as the borrower lives in the house; receive a monthly annuity for a set period of time chosen by the borrower; or take out a line of credit that can be used at the borrower’s discretion.
As I mentioned, in most cases I believe reverse mortgages should be considered as a last resort source of income, but they can be a great planning tool for cash-strapped homeowners. They probably make the most sense for those who don’t plan to move, those who can afford the cost of maintaining their home, and those who want to access the equity in their home to supplement their income or have money available for a rainy day. Keep in mind though that the fees and other closing costs for a reverse mortgage tend to be high. I recommend that before you tap into your home equity through a reverse mortgage (or any other type of mortgage for that matter), that you explore all other sources of income first. Liquidate your portfolio over time, cut down on your living expenses if possible. If there still isn’t enough, then maybe a reverse mortgage may make sense for you.