Chances are you’ve probably seen someone on TV trying to sell you on the idea of a reverse mortgage. Celebrities telling you your home could provide you with a “monthly dream retirement income” sounds almost too good to be true. Is it? Let’s take a look at the ins and outs of reverse mortgages.
What’s a Reverse Mortgage?
A reverse mortgage is a type of home loan that allows you to convert a portion of equity in your house into cash. With regular mortgages, borrowers make monthly payments in order to pay down the debt on their mortgage. The mortgage loan isn’t settled until the borrower sells the home, moves, or dies. The mortgage loan is then repaid or the home is sold to pay off the debt of the mortgage loan. With a reverse mortgage, your house pays you.
You can qualify for a reverse mortgage if you meet the following criteria:
You’re at least 62 years old
Your home is paid off or significantly paid down
Your home is your primary residence
You owe zero federal debts
Your property is a single-family dwelling, a multi-family unit up to a fourplex, or a Department of Housing and Urban Development-approved condominium
You have the income to continue to pay your property taxes, insurance, maintenance expenses, and any HOA fees
Reverse mortgages give retirees the chance to take advantage of the equity they’ve built up over the years by turning it into a loan to fund their retirements.
How Does a Reverse Mortgage Work?
Just like a regular mortgage, you have to apply and be approved by a lender for a reverse mortgage. Lenders will crunch some numbers based on your finances, age, and property value to ascertain the loan amount they can offer you. But with a reverse mortgage, you won’t be making payments every month - you’ll be taking payments from the home equity you’ve already built. So, the bank is lending you money you’ve already paid on your home, but it’s also charging interest.
This may seem appealing for a few reasons. You won’t be making any monthly payments, and you won’t have to pay any interest until you sell the home. However, if you die before you’ve sold your property, your family will be left behind with a few options: pay off the full reverse mortgage and all interest that accrued over the years or surrender the house to the bank. Basically, your reverse mortgage may secure some helpful cash flow during your retirement, but it will also put yourself and your heirs at financial risk.
What can go Wrong with a Reverse Mortgage?
Reverse mortgages are marketed as a reliable lifeline for seniors - borrowing from your paid-off home may seem like a financially smart decision. But is it? When it comes to a reverse mortgage, you actually won’t be entitled to take advantage of the true value of your house. Factors such as your age, home value, and the amount of equity you’ve built up all contribute to the amount the bank is willing to pay you. On top of that, you’re not going to be receiving the full amount you qualify for. After factoring in fees, you’ll be receiving even less of a payout.
Reverse mortgages are rife with hidden costs, and most borrowers are apt to pay for these fees with the loan they’re receiving, which will just cost the borrower more in the long run. Lenders are allowed to charge up to 2% of a home’s value for an origination fee for the reverse mortgage, which must be paid upfront. Furthermore, you’ll have to pay an initial mortgage insurance premium of 2%, as well as a 0.5% annual mortgage insurance premium. You’ll also have to pay the closing costs usually associated with the mortgage process, including property appraisals and processing fees. These fees quickly add up and begin chipping away at your profit before you even begin to reap the benefits of the reverse mortgage. And don’t forget, a reverse mortgage only lets you tap into a certain percentage of your home’s value, and once that percentage is met, your money will stop. And still, your interest rates will begin to increase as soon as you’ve signed your mortgage agreement, so the amount of money you owe will increase over time until the loan is paid off.
And that’s not where the potential problems end. Reverse mortgages advertisements often make statements such as “You’ll never end up owing more than your home is worth.” But that’s not necessarily true. High interest rates can easily add up over time, especially if you have a loan with a longer term length. It can be pretty easy to leave an estate that owes more than your home is worth. Instead of passing on a paid-off home to your loved ones, you could be passing on a massive debt.
Furthermore, a reverse mortgage won’t guarantee you a secure retirement. People who typically turn to reverse mortgages are in situations where they may be on tight budgets anyway. When you draw the last reverse mortgage payment, you’ll still be left with property taxes and utility bills. Even if you have a reverse mortgage, you can still lose your home.
The reverse mortgage industry has a questionable reputation to say the least. The Consumer Finance Protection Bureau has fined multiple reverse mortgage companies over allegations of false claims throughout the years. It was found that many homeowners with reverse mortgages were told they wouldn’t have to make their monthly mortgage payments or ever face foreclosure, but were never properly educated on the possible negative outcomes of a reverse mortgage or given information.
A reverse mortgage may seem like a good solution, but these types of mortgages can have some serious consequences. Before you make a decision on a reverse mortgage, it’s critical to consult with an expert who can guide you toward the right direction. Contact the team at Borders and Borders to help guide you through your journey.