Are you close to retirement but need more money than you’d initially planned for? You have a number of options available when it comes to borrowing money, including a reverse mortgage. A reverse mortgage is a type of loan that leverages the equity you have in your home. They’re typically available to people over the age of 62 who are looking to secure more money on a monthly basis or as a lump sum.
But is a reverse mortgage a good idea? It may sound great to have an extra source of income, but it is important to consider if a reverse mortgage is the right financial decision for you. Learn everything you need to know about reverse mortgages to determine if getting one is the right move for you in your financial journey.
How Does a Reverse Mortgage Work?
A reverse mortgage is a type of loan that borrows against your home equity. A lender will gather information about your age, financial situation, and the value of your property. From there, they will determine how much you are able to secure. However, instead of paying money toward the home’s principal, a percentage of your home equity gets converted into cash that you can use. Essentially, the bank will lend you money that you’ve already paid on your home.
You don’t pay this back on a monthly basis. Instead, you pay it back in a lump sum in one of three ways:
- You sell the house.
- You pass away and your survivors sell the house.
- Your heirs pay off the loan after you pass in exchange for the deed.
While there are ways to get out of a reverse mortgage, it can be rather cumbersome, so be sure to consider all of the options before making your decision.
Who Qualifies for a Reverse Mortgage?
As mentioned, reverse mortgages are generally for older homeowners who are close to or already in retirement. The older you are, the more money you may qualify for — this is because of principal limit factors, which provide you with more money in a reverse mortgage as you age. In addition, you need to own the home outright or have a very low balance on your remaining mortgage. If you do still have a balance on your current mortgage, you must be able to pay it off when you close on your reverse mortgage.
You may not be delinquent on any federal debt, and you must have enough funds or agree to set aside a portion of the reverse mortgage’s funds to pay for ongoing property charges like taxes, insurance, and maintenance. The home also needs to be your primary residence, and it has to be in a suitable living condition.
Is a Reverse Mortgage a Good Idea?
The decision to obtain a reverse mortgage really depends on your unique financial circumstances. If you are over the age of 62, then a reverse mortgage can be an effective method of getting a loan with some flexibility. You won’t have to make monthly payments, and reverse mortgages don’t require a minimum credit score or consider a debt-to-income ratio (your monthly debt payments compared to your gross monthly income).
What Should I Consider Before Taking Out a Reverse Mortgage?
There are a number of things to consider before deciding if a reverse mortgage is the right option for you.
- The condition of your home: When looking to secure a reverse mortgage, your home will need to be in good condition, and you will need to cover ongoing maintenance. If there is something that needs to be fixed to qualify your home as being in good condition, consider the upfront costs. Some people don’t actually realize that there are upfront costs associated with getting a reverse mortgage. Many of these upfront costs include a home inspection, legal fees, and insurance. If you don’t maintain your home properly, the lender can accelerate the reverse mortgage.
- The market value of your home: Some lenders may require your home to be worth a certain dollar value for you to qualify. If you have a higher-valued home, you may get a larger loan. Just remember that the more you borrow, the higher fees you will pay.
- The residents of your home: Additionally, you will need to stipulate and identify if anyone else lives in the home who isn’t on the title of the property. If you pass away and the individual living in your home is not on the title, unfortunately, they will be forced to sell the home when the reverse mortgage is due (unless they can pay back the reverse mortgage from another source of funds).
If you fail to fulfill any of the obligations set out in the terms of your agreement, the lender could force you to sell so the mortgage doesn’t go into default. In extreme cases, the house will go into foreclosure.
What Is Bad About Reverse Mortgages?
While there are situations when a reverse mortgage is a smart choice for your financial situation, there are times when it could leave you at a disadvantage. The most obvious reason not to get a reverse mortgage is if you are looking to leave an inheritance or the property to your heirs. A reverse mortgage is not assumable and so the property will need to be sold to pay off outstanding debts. An assumable mortgage is when a buyer can take over a home with little to no change in the terms of the mortgage and interest rate.
Another reason not to get a reverse mortgage is if you or your spouse are looking to stay in the home. Often, a couple will put the name of the oldest person on the reverse mortgage because the older you are, the bigger the payout you will receive. The surviving partner is able to stay in the home as long as they are on the title and if the reverse mortgage is a Home Equity Conversion Mortgage (HECM). This option is only available through an FHA-approved lender, as it’s insured by the federal government.
That being said, there may be some cases where the spouse may not be able to stay in the home. With a HECM, your surviving spouse can remain in the home if they are a co-borrower, and they won’t have to pay back the mortgage until they move out or also die. If your spouse or partner isn’t a co-borrower, then they could only remain in the home if they qualify under specific guidelines set by the United States Department of Housing and Urban Development. Children and other dependents will most likely have to move.
Your heirs will most likely need to sell the home in order to repay the reverse mortgage. If the loan balance is more than your home’s worth, then your heirs won’t have to pay the excess. Afterward, the lender will take the proceeds as payment on the loan, and FHA insurance will cover the remaining loan balance. If your survivors want to keep the home rather than sell it, they must pay off either the full loan balance or 95% of your home’s appraised value, whichever is less.
Last, you should not pursue a reverse mortgage if you or your spouse have medical conditions that are worsening. You need to be living in your home for the reverse mortgage to stay active. Should you move out, perhaps for a hospital or care facility stay for longer than 12 months, the lender can request immediate payment on the reverse mortgage.
Do your research to determine if there are other home equity options that might suit your needs better, such as a home equity investment from Point. With an HEI, you can unlock up to $350,000 with no monthly payments, and you can maintain full control over your home and your financial legacy. You can repay your investment, plus a share of your home’s appreciation, at any time during the flexible 30-year term. The HEI is also assumable and has more flexible debt-to-income ratio requirements than most traditional financial products. See if you qualify for a Point HEI today.Tags: Home Equity