The More You Know:
Pros and Cons of a Reverse Mortgage
About Reverse Mortgage Loans
Now that you know what a reverse mortgage loan is, learn more about the process of getting one and if it’s the right decision for you as you head into your golden years. Start by understanding the different types of reverse mortgages, and then analyze how each option could affect you now and your family in the future.
Types of Reverse Mortgage
There are three types of reverse mortgages, all with differing functions:
- Federally-Insured Reverse Mortgages, also known as Home Equity Conversion Mortgages, (HECM) are insured by the Federal Housing Administration. These require a more significant down payment so that seniors can purchase a new home that better fits their needs such as proximity to family or healthcare, or immediate cash flow. The downside of the greater initial investment is that the equity in the home will be used faster, and thus the end-loan will be greater when the loan becomes due. It’s also important to note these are only offered by FHA-approved lenders.
- Single-Purpose Reverse Mortgages are usually offered by government agencies or non-profits. This type of reverse home mortgage is likely to occur in an existing property ownership, and pulls from existing equity on a traditional loan. This type of loan is typically issued for specific purposes such as home repairs or property taxes, and is paid out as a one-time lump sum.
- Proprietary Reverse Mortgages are similar to single-purpose reverse loans, but done through private companies. They are the least common type of reverse loans due to the lack of insurance or restrictions from the government. This often leads to difficult negotiations ending in higher interest rates that leave the owner and their heirs more at risk in the reverse mortgage. The biggest upside is that the lump-sum funds can be used for any purpose, including debt or cash flow.
HECM are the most common between the three different types of reverse mtgs, but you should be sure to consult an agent about which type of loan is best suited for your needs.
Pros of a Reverse Mortgage
The inherent meaning of a reverse mortgage loan is that the borrower doesn’t have to make monthly payments towards the loan balance. This means that the money borrowed from the bank can help homeowners enjoy their retirement by putting money in their pocket for living expenses, debt repayment, healthcare expenses, and more. In some instances, homeowners facing foreclosure can even use a reverse mortgage to pay off their existing mortgage, potentially stopping the foreclosure.
Some of the other pros of a reverse mortgage include the fact that money you borrow via a reverse mortgage doesn’t need to be repaid until the borrower dies, moves out, or leaves the home for any reason. Furthermore, the borrower will never owe more than the home is worth regardless of how much they borrow or what happens to their property value over time. In fact, the borrower or their heirs will even get to keep the difference if the reverse mortgage’s balance is less than the home’s value at the time of repayment. Additionally, the non-borrowing spouse not listed on the mortgage also has the option of remaining in the home, even after the borrower dies.
Risks of Reverse Mortgage
Even though there are several benefits to a reverse mortgage, there are still some risks to consider. Afterall, if getting a lump sum or monthly payments up front had no risk, wouldn’t everyone do it? First and foremost, a reverse mortgage forces you to borrow against the equity in your home, which could end up being a key source of wealth for you or future generations. There are also fees associated with owning a home, including the cost to maintain a home, property taxes, and HOA fees that are not considered in the amount of your reverse mortgage.
Some of the other common pitfalls that can hurt a reverse mortgage owner include hidden fees and a contract clause from a bad lender. To mitigate this, be sure to have an accountant and lawyer review all documents before you sign.
You should also be prepared for interest rate changes eating up the equity in the house. In the long-term, this can end up saddling your family with unexpected expenses. Or, worst case scenario, if the loan balance ends up exceeding the home’s value, you or your heirs may need to sign a deed-in-lieu of foreclosure and give the house to the lender.
There are also unexpected events that can cause immediate payment on the home to be due. For example, illness, injury, or being deemed unqualified to reside in the property can affect how long you can live at the property. Additionally, if you pass away or the home is no longer your primary residence for more than 12 months, the loan will become due. This means either you or your family will have to repay the loan or put the home up for sale to settle the debt.
Although less common, a reverse home mortgage may also leave you deemed ineligible for certain government programs such as Medicaid. Be sure to consult with a licensed professional as you explore whether a mortgage or reverse mortgage is a better option for you at this time.
Banks that do Reverse Mortgages
Following the housing crisis in 2008, some of the larger financial institutions including Wells Fargo and Bank of America have stopped participating in reverse mortgages because of price fluctuation. This might be an indicator that there is in fact risk involved for all parties. Still, smaller institutions tend to be willing to share the risk and the reward with reverse mortgage candidates.
There are national lenders like M&T, Firstbank, and Goldwater that do offer reverse home loans, but smaller local banks may end up being your preferred option. In Arizona, these are several reputable lenders including ARLO, Quicken, and Reverse Mortgage Funding.
How Do I Qualify For a Reverse Mortgage?
This is a common question, and for good reason. Due to this being a late-stage mortgage, most people have not heard of it and overlook it going into retirement. To be eligible for a reverse mortgage, the youngest borrower on the title must be at least 62 years old with financial eligibility requirements that are established by HUD. These include being the primary resident of the home the loan is applied to, and not having outstanding federal debt.
One of the key components is having sufficient home equity to draw from. This is where having an experienced agent can save you and your family thousands of dollars over time. It’s also important that you remain current on property taxes, homeowner’s insurance and other mandatory obligations, such as homeowners association dues. As you start calculating the difference between a mortgage and reverse mortgage, be sure to keep the total cost of the home in mind.
What is the Process of Getting a Reverse Mortgage
After you’ve answered the question of what is a reverse mortgage loan, analyzed the pros and cons of this type of mortgage for your particular situation, and find out if you qualify, you can start researching how to actually go about getting one.
It’s easiest if you start by having a home in mind that you want to apply the reverse mortgage to. Then, make sure you meet the specific requirements for the application and understand the existing terms of the home mortgage, or the home you are targeting in HCEM loans. You’ll also need to make sure you have personal and financial statements available for agents and lenders to review. This is a really good time to take an honest look at your ability to utilize reverse mortgages.
From there, you must fill out paperwork that typically takes about 45 days to process. You will need valid ID, as well as documents supporting your residence such as mortgage statements, tax bills, and homeowners’ policies.
To finish up the process, you must attend HUD-approved counseling that will go over many of the topics in this piece documenting the risk. Again, do not take the risk lightly and know there is a fee associated with this consultation. Once this is completed, you will get a certificate that is necessary to obtain the reverse home loan.
The final step is finalizing the terms, closing the deal, and setting parameters of payment. Depending on which type of loan you use, you will either receive the lump sum relative to terms, or a fixed monthly amount decided on by you and your lender. Most reverse mortgage homeowners choose to receive their payment as a line of credit.Each of these is an important step towards qualification. Educating yourself through federal guidelines as well as chatting with a qualified agent will save you time, money, and stress on your way to the bank.
Should I Speak to a Realtor Before Getting a Reverse Mortgage?
Speaking with a realtor before pursuing a reverse mortgage can help you avoid common pitfalls and avoid a tricky financial situation. Realtors will have knowledge about property values in your area, allowing you to assess your home and get the most equity out of it. Additionally, good realtors will have experience in dealing with reverse home loans, and will be able to advise you about critical errors that might come up for your specific wants and needs.
Mostly, reverse home loans are about managing risks and expectations, and an experienced realtor can help with that. They can also use their connections with lenders to get you the best interest rates, help you shop around, and map out your costs from start to finish.
Is it Better to Downsize or do a Reverse Mortgage?
Downsizing a home is a common and straightforward option for retirees: you sell your existing home and buy a cheaper one using the proceeds. Then, you can reinvest your additional capital or use it to fund your lifestyle. In many cases, this is the best option to maintain your assets and even grow them. However, it does not provide the cash flow that some owners may need. Typically when cash flow is the driving force, a reverse mortgage can be the best option. Otherwise downsizing is usually your best bet.
Consulting with a realtor can help you make a choice about which is best for your personal retirement journey.
Find the Right Retirement Home for You
As you explore the options of a traditional mortgage vs reverse mortgage, keep in mind the type of retirement you want, and how your current finances line up with that vision. Reverse mortgage loans can be a great solution for consumers ages 62 and older who own their homes outright — or at least have a considerable amount of equity to draw from. If you are able to properly map out the risk and understand how to avoid pitfalls, it is a great way to free up extra cash.
If you’re not sure, how to best maximize your retirement income, chat with one of our experts about how to find the right retirement community and home for you.
Find out which retirement or active adult community is right for you.