Pros and Cons of Reverse Mortgage for Senior Citizens
What Is A Reverse Mortgage?
Simply put, A Home Equity Conversion Reverse Mortgage (HECM), commonly referred to as a reverse mortgage, is a loan available for senior homeowners aged 62 years or older that provides guaranteed income during retirement. Often considered as a last resort source of income for senior citizens, reverse mortgage allows them to access a share of their homes’ equity and use the homes as collateral. This loan is insured by the Federal Housing Administration (FHA). The loan got the name ‘reverse mortgage’ because instead of senior homeowners making monthly payments to a lender as it is the case of traditional mortgage, the lender is tasked with the responsibility of making payments to the borrower. These loans allow homeowners to convert part of the equity in their homes into cash with no monthly mortgage payments. Typically, the borrower is not required to repay the loan unless the home is either vacated or sold. The benefits are appealing: you get to keep your home and get money for daily expenses. But there are also significant drawbacks for some borrowers as you will come to learn later in the article. We will discuss the pros and cons of Reverse Mortgage for Senior Citizens to help you make an informed decision.
How Does A Reverse Mortgage Work?
Reverse mortgage was introduced as a means to assist seniors with limited income utilize the accumulated wealth in their homes to cater for health care, home renovations and monthly living expenses. Retirees are however not restricted as to how they can spend reverse mortgage proceeds. If, for instance, you have an existing mortgage, you can use the reverse mortgage loan to clear your existing mortgage and get rid of monthly mortgage payments. Federal regulations require reverse mortgage lenders to structure the transaction in such a way that the loan amount does not exceed the home’s value. In the event that the loan balance grows to be larger than the home’s value, the borrower’s estate won’t be held responsible for paying off the difference. After securing a reverse mortgage, borrowers are required to meet all the loan obligations by continuing paying insurance and property taxes, in addition to maintaining the house in accordance with FHA guidelines.
As mentioned, reverse mortgage loan uses your home’s equity as collateral. The amount of money you can secure depends on several factors including interest rates, maximum lending limit, sale value, and the lower end of your home’s appraise value. Due to HECM requirements, funds available to a borrower may be restricted for 12 months. This may necessitate you to allocate additions funds from loan proceeds to pay off insurance and taxes. You can choose to receive proceeds in one of the following 6 ways: lump sum, term payments, equal monthly payments, line of credit, equal monthly payments + a line of credit, and term payments + a line of credit.
The loan is repaid 6 months after the last surviving homeowner permanently vacates from the home or dies. The home might be sold to repay the balance and the next of kin receives any remaining equity.
Individual Eligibility Requirements for a Reverse Mortgage
You must meet the financial eligibility criteria set by the Department of Housing and Urban Development (HUD). The FHA requires the youngest borrower to be 62+ years to be eligible for a reverse mortgage loan. If both partners are on the loan, the lender will use the age of the younger spouse to calculate the loan amount. Married, single, divorced or widowed doesn’t play a direct role in eligibility. You need to complete a HUD approved counseling session that will cost you about $125. If you have an existing mortgage on your home, the mortgage must be settled with the proceeds from your reverse mortgage loan. You will be required to pay an upfront insurance premium, origination fee, loan servicing fees, ongoing mortgage insurance premiums and interest.
Property Eligibility Requirements for a Reverse Mortgage
Your home must meet the minimum FHA property standards. Typically, most townhouses, single family homes, approved condos, 2-4 unit owner occupied dwellings or manufactured homes are eligible for a reverse mortgage loan. Cooperative housing owners can’t access reverse mortgage loans as they don’t technically own the houses.
Let’s dive straight into the pros and cons of Reverse Mortgage for Senior Citizens.
Pros
- A reverse mortgage loan allows you to retain the title to the home and keep living in your home as long as you keep up with maintenance, insurance and property taxes.
- Flexibility– the reverse mortgage loan can be used in different ways by different types of borrowers. If you have financial difficulty, you can channel the finances to cater for the bills. If you have adequate resources, you can consider using the loan as a financial planning tool.
- Low possibility of default– unlike other loan types like home equity loans, with a reverse mortgage loan, you will never have to worry about losing your home for of non-payment. This is simply because you are not required to make any payment until you vacate your home permanently.
- Non-taxable loan proceeds – loan proceeds from a reverse mortgage loan are tax free whether you receive them in a lump sum or as fixed income.
- Various payments options – depending on the lender, you have the luxury of choosing from 6 payment options: annuity, credit line, lump sum or a combination of the above.
- Reverse mortgage loans are generally easier to qualify as there are no credit score requirements or minimum income you have to meet.
- If payoff balance exceeds your home’s value, your heirs are not personally liable.
- Your heirs can repossess your home once they finish paying off the reverse mortgage.
Cons
Despite being a popular option for many homeowners, reverse mortgages don’t make sense for everyone. They may sound like a pretty decent idea on the surface but recent years have witnessed growing complaints from dejected borrowers. A reverse mortgage can turn into a nightmare for you and your family if your objectives do not fit the right profile. Before making a decision to secure a reverse mortgage loan, it is advisable that you discuss it with you family and a financial expert.
- High interest rates and upfront costs– when compared to the costs of obtaining a regular home loan, the upfront costs of reverse mortgages are usually higher. This can be attributed to the way reverse mortgage loans are structured. Their interest rates tend to be 1.5 percent higher than regular home loans. Besides, you have to pay off mortgage insurance premiums, closing costs and finance charges.
- A burden on heirs– In the event of your death, you estate is required to pay off the remaining balance. If you intend on leaving your home as part of an inheritance, you should reconsider going for a reverse mortgage loan. Your heirs will be required to pay up to 95 percent of the balance to keep your home.
- Misleading terms– many senior homeowners enter into loan agreements with little understanding on how reverse mortgages work. Most borrowers and their families have in the past complained about not being able to renegotiate terms. They only realize when it’s already too late that they have to pay exorbitant fees and high interest rates.
- Difficulty accessing other loan types– if you are a homeowner with a reverse mortgage loan, you limit your chances to qualify for other loan types. You also can’t refinance your reverse mortgage as over time, the accrued interest swallows any remaining equity in your home.
- Not all homes qualify– only primary residences qualify for reverse mortgage loans. Investment homes and vacation homes are not eligible.
Conclusion
The high costs of reverse mortgages are not worth it for most senior citizens. You are better off relocating to a cheaper city or putting your home up for sale. It is better to keep whatever equity you have in your pocket instead of owing it to a lender. If, however, you comprehend how a reverse mortgage loan works and the trade-offs involved, it can be a useful financial tool. Before taking out a reverse mortgage, consider the pros and cons of Reverse Mortgage for Senior Citizens discussed above. Some of the biggest names in reverse mortgage lending include Liberty Home Equity Solutions, One Reverse Mortgage and American advisors Group. Compare fees and rates before settling on one lender.
For more to consider when caring for elderly parents, check out the following list.
