5 Things to Consider About Reverse Mortgages

What is a Reverse Mortgage Loan?

Reverse mortgages have been around for years now. It is an effective means that helps homeowners within a certain age range leverage the equity in their home. With a reverse mortgage, homeowners can withdraw a portion of their equity and pay when they want to leave the home permanently, or sell.

Are you wondering why a homeowner would want to take a loan against the home they worked so hard to pay off? In this article, we will walk you through how reverse mortgages work and what homeowners who are considering it need to know.

Understanding the Basics

Reverse mortgages are types of loans homeowners who are 62 years and above can take. These homeowners have paid off their mortgage and are allowed to borrow part of their home’s equity as tax-free income. This is different from a normal mortgage where the homeowner pays the lender. Here, it is the lender that pays the homeowner.

In a reverse mortgage, the homeowner who engages in it do not have to pay monthly. They are allowed to keep living in the house, but the loan must be repaid when the borrower sells the home, moves out permanently, or in the case where they die.

Home Equity Conversion Mortgage (HECM) is one of the most popular types of reverse mortgages and is fully backed by the federal government.

Pros and Cons of Getting a Reverse Mortgage

You might be very excited at the idea of having enough cash for your day-to-day living at the expense of your home's equity. Still, things like origination, servicing fees, and insurance mortgages can add up here. You should consider the pros and cons before making a final decision.

Pros

• There are no monthly payments towards clearing off the loan.
• The loans can really help in debt repayment, healthcare expenses, and other pressing bills.
• Homeowners who take reverse mortgages can enjoy their retirement.
• After the death of the borrower, spouses who were not listed in the mortgage are free to continue living in the home.
• Reverse mortgages are a valid option to stop foreclosure and pay off existing mortgages.

Cons

• The homeowner who takes a reverse mortgage is mandated to maintain the house and pay homeowners insurance and property taxes.
• Reverse mortgages eat into your retirement funds by letting you borrow against your home's equity.
• There may be little cash left after making fees and closing costs, which in some cases can be high.

How to Apply for a Reverse Mortgage

One important criteria for applying for a reverse mortgage is that the homeowner must be 62 years or older. However, in a case where the spouse is under 62, other eligibility criteria must also be met before applying for a reverse mortgage.

• You must have a home of your own or have a single primary lien to borrow against.
• You must pay off any existing mortgage using the fund from your reverse mortgage.
• The home must be your current primary residence.
• Homeowners’ insurance, property taxes, as well as other compulsory legal obligations like association dues for homeowners must be current and adhered to.
• A prospective reverse mortgage applicant must take a consumer information session handled by a HUD-approved counselor.
• The property must be in good shape and well maintained.
• The home in question must be a single-family house built after June 1976, a multiple unit property having up to four units, a townhouse, or a condominium.

Bruce McClary, a spokesperson for the National Foundation for Credit Counselling cautions, "Seniors should be careful to make the most of the loan by budgeting carefully in order to avoid running out of funds too soon and to be sure that taxes and insurance are paid as agreed."

What You Should Know Before Getting a Reverse Mortgage

One thing you must understand is that a reverse mortgage is a loan; make no mistake about that. Every loan must be paid back. You really need to know what you're about to get into, otherwise you could end up in a messy situation.

If you're thinking about a reverse mortgage, we have outlined some things to consider. After considering them, meet with your family, an attorney, and most importantly, a HUD-approved counselor. Take note of the following while considering a reverse mortgage:

• Find out all about mandatory and extra fees.
• Be sure if your spouse is included in the ownership of your house.
• Don't make a reverse mortgage the first resort, but the last one if at all you should take one.
• Be skeptical while handling the credit line option.
• You can't take out a reverse mortgage if you're less than 62.