Many seniors have seen reverse mortgage TV ads by that handsome devil, Tom Selleck. Reverse mortgages allow you to access your home’s equity even while you continue to live in it. Then pay the money back when you move out, often from the proceeds of a home sale. Last year more than 30,000 Americans borrowed against their homes in this way, according to the National Reverse Mortgage Lenders Association.
Who Can Qualify for a Reverse Mortgage?
Reverse mortgages are available to homeowners 62 years old and up. “The older you are, the more benefit you’ll be allowed. As a rule of thumb, a 62-year-old reverse mortgage borrower can expect to borrow roughly 45% of the appraised value. A 90 year old may qualify for as much as 85%. Because a 90 year old is closer to passing the lender does not have to wait to be repaid as long as a 62 year old. So they can afford to loan more.
And, contrary to what you might expect, you might qualify for a reverse mortgage even if you already have a mortgage, says Bruce McClary, spokesman at the National Foundation for Credit Counseling. “The bottom line is you don’t have to own your home free and clear. There are reverse mortgage options available if you have a conventional mortgage,” he says.
That said, entering into a reverse mortgage — especially if you already have a conventional mortgage — is a decision that should come only after you’ve invested the time researching your options.
Reverse mortgages have been around since the early 1960s. “Used strategically, a reverse mortgage can greatly improve the sustainability of your retirement income,” says Wade Pfau, professor of retirement income at the American College of Financial Services told MONEY in 2016. With the recent roller-coaster ride the market has been on over the past couple of months, this advice is even more true today.
How Does a Reverse Mortgage Work?
Unlike a typical mortgage, in which you pay the lender a set amount every month until the loan is paid off, the key feature of a reverse mortgage is the bank is making payments to the homeowner. Choices include a lump sum after closing and a line of credit that grows with time and monthly payments. The homeowner chooses what is best for their situation.
No payments are ever required from the homeowner. However, they can be made if the homeowner wishes. Since the homeowner still owns the home they are still responsible to pay the taxes and insurance and keep the home in good repair.
The loan comes due after the homeowner dies or moves out of the house. At this point, the loan will need to be repaid — which usually means selling the home in order to come up with the funds.
“That is not a weakness of the program, it is by design,” writes Jack Guttentag, a retired economist who maintains the Mortgage Professor website. “The presumption is that the homeowner can make better use of the equity than his or her heirs.”
Another key feature is the only way for the lender to receive repayment is thru the home itself. No heirs are ever required to help repay the loan.
Although there are a few different kinds of reverse mortgages, the one you’re most likely to encounter is a federally-insured home equity conversion mortgage, or HECM.
A reverse mortgage might sound similar to conventional home equity loans or lines of credit; the difference is that with a reverse mortgage the borrower retains title to the home and the loan doesn’t have to be repaid until they are no longer living in that home. Home equity loans must be repaid. If they’re not a foreclosure is possible.
Unlike conventional mortgages, though, most reverse mortgages have variable interest rates. Although aggressive Federal Reserve intervention to prop up the economy over the past couple of months makes it likely that rock-bottom interest rates will be with us for some time to come, there is the potential for higher rates in the future. However, the rate does not affect what the borrower qualifies for after the loan is locked before closing.
Reverse Mortgage Pros and Cons
Since there are many ways a homeowner can access that equity — as a line of credit, monthly payment, lump sum or some combination of those options — there are a host of variables that go into calculating the value, and the cost, of a reverse mortgage. Given the long time trajectory of reverse mortgages, it’s worth keeping in mind that the home is likely to appreciate in value, as well (although this isn’t guaranteed).
Although new rules introduced in 2013 go a long way towards making sure that reverse mortgages are safer today than they were in the past, they’re still complicated enough that it helps to have an expert in your corner.
“If you want impartial advice as to whether it’s a good idea, you really need to talk to a nonprofit organization that provides counseling and doesn’t have a stake in it,” In fact, independent 3rd party counseling is required for every reverse mortgage to insure the borrower is not being brow beat into taking out a reverse mortgage.
Go to a HUD-approved housing counseling agency and look for agencies specifically approved to provide reverse mortgage counseling.
Pros
• The biggest selling point for a reverse mortgage is that as long as you’re living in the home, the loan doesn’t have to be repaid. “You have the choice of either repaying the loan or using the funds without having to repay the loan at all,” McClary says. “Ultimately, the loan gets repaid when the home is sold.” And non-borrowing spouses are protected, as well. They can live in the home without payments as long as it also is their primary residence.
• A reverse mortgage can act as a “safety net” by drawing on the equity you have in your home, rather than tapping higher-priced sources of funds like credit cards.
• You can use reverse mortgage payments to put off drawing Social Security, or to preserve your retirement savings. Especially in a bear market like the current one, a reverse mortgage can give you a supplementary income stream that can keep you from drawing down your retirement nest egg. “Because of the Covid-19 pandemic and the imminent recession, it’s a way for households to increase cash and liquidity,” says Ken Leon, director of equity research at CFRA Research.
• The money you get every month from a reverse mortgage isn’t income — so you don’t have to pay income tax on it. A reverse mortgage is simply a loan. It’s not an income qualifier.
Cons
• On the flip side, though, you (or your heirs) don’t get to claim any tax deduction when the loan is paid off, as is the case for a regular mortgage.
You need to budget for the real estate taxes and the homeowner’s insurance.
However, except for the appraisal, all costs and fees are not paid directly. They are deducted from the loan proceeds. There is insurance on every reverse mortgage. It ensures that the borrower will never owe more than the home sells for. It also ensures that if the borrower has taken the credit line option, that the funds will be there even if the lender goes out of business,”.
To find out how much tax free cash you may qualify for please contact:
Ray Antonelli; Senior Mortgage Banker; NMLS 800476
216 337 7520 9:AM to 9:PM
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