The Honest Broker: Reverse Mortgages
BY: DIANE LOTT, BROKER
PARADISE FOUND REALTY, INC
A reverse mortgage is a loan for homeowners aged 62 and older who want to borrow against their home equity without having to make monthly payments and can help seniors who are short on funds for living expenses. Taking out a reverse mortgage also means spending a significant part of your home equity on loan fees and interest. In addition, the loan terms can put the homeowner, spouse, and heirs at risk of losing money and a place to live.
Though a reverse mortgage may be ideal for some situations, it’s not right for all senior homeowners. There are up-front costs, and a reverse mortgage may be a costly choice for anyone planning to move soon. Prospective borrowers should understand how spouses, partners, roommates, and heirs might be affected by a reverse mortgage. Under the right conditions, a reverse mortgage can be an excellent tool for long-term financial stability in retirement.
Things to consider:
* Are you Planning to move soon?- Financially wouldn’t be prudent with the associated costs
*Is your spouse 62 or older?– Any borrower on a reverse mortgage must be at least 62 years old.
Keeping up with your property taxes, homeowners’ insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable. If you don’t pay your property taxes, the county tax authorities can place a lien on your home, take possession of it, and sell it to recoup the taxes owed.
*Do you consider your home just an asset?
Some homes have sentimental value. If your home has been in the family for decades or generations, your children might hope to keep it that way.
*Is there enough equity?
To qualify for a reverse mortgage, you must either own your home outright or have roughly 50% equity, at least. You need to have enough equity so that a reverse mortgage will leave you with a reasonable lump sum, monthly payment, or line of credit after paying off your existing mortgage balance (provided you still have one).
*Possible to Enter into a Long-Term Medical Facility?- Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. Reverse mortgages require borrowers to live in the home as their primary residence. In fact, borrowers must certify in writing each year that they still live in the home they’re borrowing against to avoid foreclosure.
*Does your home have sentimental value?
When the last reverse mortgage borrower dies, the loan becomes due and payable. Heirs who want to keep the house can pay the reverse mortgage balance to the lender. However, they’ll need cash or another mortgage to pay off the loan.
If heirs can’t or won’t repay the loan, the lender will sell the home to recoup what the borrower owed. Any positive balance between the sale proceeds and the loan balance goes to the borrower’s estate. If there’s a negative balance, Federal Housing Administration (FHA) insurance covers it. The heirs receive nothing, but they don’t owe anything, either.
Homeowners who suddenly vacate or sell the property generally have just six months to repay the loan.
*The high costs of a Reverse Mortgage
Home equity conversion mortgages (HECMs), the most common type of reverse mortgage, have several one-time fees and ongoing costs. The most significant of these are origination fees, other closing costs, and mortgage insurance premiums, along with the interest the borrower accumulates on the loan balance.
Factors After Securing a Reverse Mortgage
*Can you Walk Away?– If your loan balance exceeds your home’s value and you can no longer stay in your home, you have a couple of choices. You can do a deed in lieu of foreclosure or walk away and let the lender foreclose. Reverse mortgage loans are non-recourse, and their debt cannot transfer to your estate or heirs.
*When Do I Have to Repay a Reverse Mortgage?
Generally, reverse mortgage loans must be repaid when you move out of the home, sell the home, or you die. However, the lender can also require the loan to be repaid if you don’t pay your property taxes or homeowners insurance, or if you stop taking care of your home.
*Can I Change My Mind After I Sign?
“With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty,” according to the Federal Trade Commission (FTC). After you cancel, the lender has 20 days to return any money you’ve paid for the financing.”
Reverse mortgages aren’t an ideal financial choice for everyone, and you may have other options, such as selling your home and downsizing. Older homeowners may also consider renting, which alleviates homeownership headaches like property taxes and repairs. Other possibilities include forward mortgages such as home equity loans, home equity lines of credit (HELOCs), or cash-out refinancing, though all of these require good credit and enough income or assets to support monthly payments.
Diane Lott, Broker
Owner: Paradise Found Realty
Paradise Found Realty, Inc. of Palm City
Your concierge real estate company. Call for your home visit today: 954-294-5060
Call to schedule a visit today: 954-294-5060
Sign up for alerts and daily digests at www.treasurecoast.com