It is the best of times, it is the worst of times. Ok, this article is not about Charles Dickens but retirement. More specifically, a retirement planning vehicle that has grown in popularity the last few years – the reverse mortgage.
You’ve probably seen the commercials, but maybe you asked yourself what all the hubbub was about. After all, you already have a mortgage, so how can this one help you. The reality is that many Americans lack the resources to pay for retirement and are turning to reverse mortgages to be their saving grace. With that in mind, here is an in-depth look at the truth about reverse mortgages.
Not for Everyone
According to renowned personal finance guru Suze Orman, a reverse mortgage can be a viable option for a retiree who needs more money. However, the devil is in the details and while these mortgages are a godsend for some people, they do not work for everyone.
Even if you think a reverse mortgage sounds great, the reality might be that it won’t fit your situation. Examples include homeowners with a high mortgage balance or a home that is worth more than the FHA loan limit. While you might be able to get a private label reverse mortgage, the terms won’t be the same as the FHA mortgage.
Another reason to think about a reverse mortgage is the closing costs as these tend to be higher than a traditional mortgage or a home equity loan. That being said, the attraction of a reverse mortgage is that it freezes your mortgage payments and this is a major attraction for borrowers.
Can’t be a Second Mortgage
Something else you need to know about a reverse mortgage is that you must use the proceeds to pay off your first mortgage. That’s right, these loans can’t be used as a second mortgage and this means that the first thing to get paid from your reverse mortgage is your existing home mortgage.
However, reverse mortgages are solely for homeowners over the age of 62. So, unless you have recently moved into a new home the odds are that the loan-to-value ratio of your home is relatively low.
You Must Complete a Counseling Session
While this might seem like more paperwork, the plus of a reverse mortgage counseling session is to make sure you understand the terms of your loan. This is important and it helps to make sure that you are making the decision to get a reverse mortgage for all the right reasons.
Even before you schedule your counseling session, you might want to look at this helpful guide at reverse.mortgage/advantages-disadvantages as it will give you some more background on the key details of these loans.
You Must Continue to Live in Your Home
To take advantage of a reverse mortgage, the home you are pledging must be your primary residence. This is important as fairly to follow this rule could see you defaulting on the loan.
Don’t think this is something which the bank won’t check. They can and they will make sure that you are still residing in your home. In addition to residency, the lender will also want to make sure that you are continuing to pay your homeowner’s insurance, property taxes, utilities, and that you are taking care of the property.
Failure to follow these requirements could see you in default. Don’t risk it, know what your lender expects from you.
There Are Limits on How Much the Lender Can Collect
As reverse mortgages become more popular, the reality that some borrowers will hold these loans for 10 or 20 years increase. As such, this means that more and more of the equity will have to be used to repay the loan.
One plus of an FHA reverse mortgage is that they are non-recourse, this means that borrower cannot be held responsible if the balance due is more than the house is worth. It wasn’t always like this, but the rule helps to protect borrowers and their families in case the housing market turns for the worse.
However, you don’t want to take this for granted. Make sure you ask your lender for the specifics on how this will work as there is no such thing as ‘free’ money.
Your Heirs Will Need to Buy You House
If you decide to get a reverse mortgage, then make sure your heirs know that they will need to buy your house from the bank. If not, then the bank will sell the home and use the proceeds to pay off the mortgage. Any money that is left over will be dispersed amongst your heirs.
One way to get around this is to take out a life insurance policy which will cover the cost of buying your home when you pass. This will ensure that your home stays in your family without requiring your heirs to pay for it.