You have probably seen all those ads for reverse mortgages with all their irresistible appeal. A reverse mortgage can provide some much-needed financial relief for older homeowners struggling to meet expenses. However, there are some drawbacks and they aren’t always the best cure for money problems. If you’re considering a reverse mortgage, you should carefully consider what is best for your unique situation. To help you make the right decision, here are the pros and cons of reverse mortgages for homeowners in Pleasantville.
What Is a Reverse Mortgage?
Reverse mortgages are designed for a specific demographic and for specific purposes.
“If you’re a property owner who is at least 62 years old, you can borrow against your equity to get cash or a line of credit from a lender. However, unlike a regular mortgage, you aren’t required to make monthly loan payments. You will be required to repay the loan when you or your heirs sell the house.
“The most common type of reverse mortgage is known as a home equity conversion mortgage (HECM). These loans are backed by the Federal Housing Administration (FHA); borrowers pay an insurance premium in order to participate, which is used to fund FHA reserves. If a borrower fails to repay their loan, then those reserves “kick in” to pay back the lender.”
In addition to the age requirement of 62, there are a few other qualifying criteria you’ll have to meet in order to get a reverse mortgage:
- You must own your home outright or have a large amount of equity.
- The home has to be your principal residence while not showing delinquency on any federal debt.
- You have to pass a credit check and certain other eligibility requirements.
- You have to be current on property taxes, insurance, and HOA fees
The name derives from the fact that your “lender actually makes payments to you” – which is the reverse of a standard mortgage. “You can choose to receive a lump sum, monthly payments, a line of credit or some combination of those options.”
That amount you owe increases over time instead of the normal decrease of a mortgage balance. This happens because the interest and mortgage-associated fees are “rolled into the balance each month. That means the amount you owe grows over time, while your home equity decreases. You get to keep the title to your home the whole time, and the balance isn’t due until you move out or die.”
When your [market-city] home is eventually sold, proceeds from the sale go to pay off the reverse mortgage debt. Any funds that are left over go into an estate, and if the sale falls short of the debt, your heirs aren’t required to make up the difference.
Pros of Reverse Mortgages
The pros of reverse mortgages include . . .
BETTER MANAGEMENT OF EXPENSES FOR RETIREMENT
Most people see a significant reduction in income when they retire, and a reverse mortgage gives them the cash to supplement their income and meet expenses.
ABILITY TO STAY IN YOUR HOME
Instead of finding a new, more affordable home, a reverse mortgage allows you to live in your established residence while staying near friends and family.
With the income from a reverse mortgage, you won’t have to pay taxes because the IRS considers it a loan rather than income. Just be aware that the interest isn’t deductible until it’s actually paid.
PROTECTION IN THE CASE OF BALANCE EXCEEDING VALUE
“Because reverse mortgage balance grows in size, it’s possible that it can exceed the fair market value of the property over time. However, the amount of debt that must be repaid can never exceed the property value.”
OPTIONS FOR HEIRS
“In an estate situation, heirs have several choices: They can sell the property to repay the debt and keep any equity above the loan balance; they can keep the home and refinance the reverse mortgage balance if the property’s value is sufficient; or, if the debt exceeds the value of the property, heirs can settle the loan by giving the title back to the lender.”
Cons of Reverse Mortgages
Now let’s consider the cons of reverse mortgages . . .
ACQUIRING DEBT THAT HAS TO BE PAID
“Reverse mortgages have costs that include lender fees, FHA insurance charges and closing costs. These costs can be added to the loan balance; however, that means the borrower would have more debt and less equity.”
LESS WITH FIXED-RATE OPTION
You have both adjustable-rate and fixed-rate options with HECMs, but the amount you can access with the fixed-rate option is less.
POTENTIAL VIOLATIONS OF OTHER PROGRAMS’ REQUIREMENTS
“Simply put, a reverse mortgage could cause you to violate asset restrictions for the Medicaid and Supplemental Security Income (SSI) programs.”
FORECLOSURE STILL POSSIBLE
Even with a reverse mortgage, foreclosure can still happen if you don’t pay property taxes, insurance, or HOA dues.
DIFFICULTIES WITH STATUS CHANGES
“Reverse mortgages can be complicated, and if something changes with your status, then your reverse mortgage options will most likely change, too. If you go to a long-term care facility then you probably wouldn’t be considered a resident in your home. If you marry after obtaining a reverse mortgage, must your spouse move out of the property if you die?”
Making the Decision . . .
It should be apparent after reading this article that reverse mortgages are fairly complicated. You should take the necessary time to research and consider whether it is right for you. However, if two conditions remain, then it may be the option for you.
- You plan to stay in your home for a long time, maybe the rest of your life. You will need to stay in the home long enough to justify the extra expenses involved with a reverse mortgage.
- You are able to cover all the other associated costs of home ownership. Additional costs like property taxes, homeowners insurance, and repairs and maintenance (as well as covering all your living expenses) can really add up.
A reverse mortgage isn’t right for everyone. The best course is to enlist the help of a professional for some guidance toward the right decision. Your Pleasantville will be glad to assist you with her knowledge of these matters. So if you’re a Pleasantville homeowner looking into reverse mortgages, contact us today at (914) 341-2998.