2021 was a big year for the reverse mortgage. With over 52,000 originating in 2021 alone, it’s not difficult to see that it’s worth considering a reverse mortgage if you’re in the right phase of your life — retirement age.
Taking a financial risk when you’re entering this time of your life, the golden years, is not for everyone, though. But as with any financial decision, there are always pros and cons to weigh.
So, what is a reverse mortgage, and is it a good idea? Find out in this blog.
How Does a Reverse Mortgage Work?
You might have heard your friends or neighbors talking about a reverse mortgage and wondered what all the buzz is about. Is it really as good as they make it out to be?
Let’s clear the air.
If you’re 62 years old or older, you’re able to apply for a reverse mortgage. In short, this gives you an opportunity to convert home equity into expendable amounts of cash. Unlike a traditional mortgage, where you pay a monthly fee based on the principal amount of the loan, plus interest, you don’t have to pay the same with a reverse mortgage. I.e. there are no monthly fees to pay.
However, you do still need to cover the cost of property taxes and homeowner’s insurance. All in all, this sounds a little too good to be true, doesn’t it?
In a way, it is. Because you still have to pay back the reverse mortgage loan amount, but only under certain circumstances which include when you sell the home, choose to move out, or you pass on. If you die, the responsibility of paying off a reverse mortgage then falls on your spouse or living heirs/family members who may need to sell the home.
But why is it called a reverse mortgage?
The process of taking out a reverse mortgage is back-to-front from a traditional mortgage. You don’t have to make a payment each month to pay off the mortgage. But this doesn’t mean it’s free. The interest on the loan amount is added to the mortgage balance each month. This means that as the loan amount grows, the interest cost increases, too.
This process continues until it’s time to pay off the mortgage.
Reverse Mortgage Insurance
It’s important to note that the FHA (Federal Housing Administration) offers insurance for most reverse mortgages. This insurance means that if you cannot repay the debt, the FHA pays it off with its reserves.
Essentially, the government offers Home Equity Conversion Mortgages (HECM). There are certain eligibility requirements and you’ll have to pay an upfront sum. This includes an insurance premium, plus an annual premium of 0.5 percent based on the outstanding loan amount. It’s these premiums that fund the FHA insurance reserves.
There are also two other reverse mortgage options to consider:
- A proprietary reverse mortgage, available via a private lender (and not subject to FHA loan limits)
- A single-purpose reverse mortgage, which you can obtain for a specific financial need, such as home renovations or paying off property taxes
Here’s a look at some of the advantages of a reverse mortgage and why it could be a good idea for you.
Why a Reverse Mortgage Is a Good Idea
Yes, there are risks involved with reverse mortgages, such as putting your home on the line. But there are risks involved with traditional mortgages, too. In fact, the risks are very similar in some ways.
Despite that, here’s why a reverse mortgage might work for you:
- It allows you to get a better handle on managing your expenses as you enter retirement. You can supplement your income and pay bills, without having to make a pricey mortgage payment each month
- You can age in place and stay near family and friends. A reverse mortgage means you can continue to live in the same home and avoid the cost of moving or having to pay rent somewhere new
- Due to the fact that the IRS views reverse mortgage income as loan proceeds, you generally don’t have to pay tax on it. However, it’s worth consulting with a tax professional to be clear on the rules
- You have the option of paying off the reverse mortgage sooner, you don’t have to wait for the loan amount to accumulate to more than your home’s worth
- Your heirs have options if and when they must settle a reverse mortgage for you. They can sell the property to repay debt, they can keep the home and refinance it, or they can settle the loan and transfer the title back to the lender
- Your loan proceeds do not impact your social security or Medicare benefits in any way
Finally, you are always protected if your loan balance ever exceeds the actual value of the home. As the reverse mortgage balance grows over the years, this is a very real possibility. However, the amount of debt you must repay can never actually exceed property value due to a case of non-recourse financing.
In short, this means a lender cannot claim any of your other assets, or those of your heir’s, in this case.
When to Avoid a Reverse Mortgage
Of course, there are scenarios when a reverse mortgage might not be a wise decision for you. Just a few of these include:
If you’re thinking of moving out of your home. Let’s say you want to move closer to your children, for example, or downsize to a smaller home. Taking out a reverse mortgage is not worth it for you.
If you have lingering health issues that might force you to move out of your home and into the care of your loved ones or a senior care center, a reverse mortgage would not be worthwhile.
If covering the existing costs of your home such as property taxes or homeowner’s insurance is a struggle for you, it’s not a good idea to add financial stress in the form of additional debt to your plate.
Considering a Reverse Mortgage?
If you’re looking for a little more financial freedom as you approach your golden years, a reverse mortgage might be the answer you’re looking for.
Reach out to our team to help demystify the reverse mortgage loan process. At GoodLife Home Loans, we pride ourselves on making the loan process simple and affordable. Get in touch today for more!