Reverse mortgages are loans available to people over 62 who would like to borrow against the value of their homes. “A reverse mortgage allows the homeowner to essentially access the equity from their home, while still living in it,” explains thestreet.com. When you buy a home and take out a mortgage, you borrow money, interest accrues every month, and you make monthly payments. A reverse mortgage is kind of the opposite of that. You already own the house, the bank gives you the money up front, interest accrues every month, and the loan isn't paid back until you pass away or move out.
“Reverse mortgages are widely criticized, and with good reason, but that doesn’t mean they’re a bad deal for every homeowner in every situation,” according to Investopedia.com. Even if a reverse mortgage is an expensive option and not an ideal one, it may still be the best for your circumstances.
To qualify for a reverse mortgage, you must either own your home outright or be close to paying it off. In other words, you need to have enough equity that a reverse mortgage will leave you with a reasonable lump-sum monthly payment or line of credit after paying off your existing mortgage balance if you have one. Getting quotes from three reverse mortgage lenders and going through reverse mortgage counseling should give you a good idea of whether it can provide a long-term solution to your financial problems.
CONS:
- They are often exorbitantly expensive — requiring additional premiums and fees. Like a regular mortgage, you'll pay various fees and closing costs that will total thousands of dollars. Instead of interest compounding on a lower number every month, like a regular mortgage, reverse mortgages compound on a higher number because of the additional mortgage insurance premiums. Keeping up with your property taxes, homeowner's insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable.
- When you take out a reverse mortgage, you are unable to apply for additional home equity loans in the future, explains Evan Roberts, a real estate agent with Dependable Homebuyers, in Baltimore, Md. "This can be an issue if a major expense arises, like surgery or big home repairs, that you can't afford on a fixed income," he says.
- In the case of death, your estate will have to pay off the remaining balance. If you want to leave your home to your children, having a reverse mortgage on the property could cause problems if your heirs do not have the funds needed to pay off the loan.
- If you move out of the house, you have a year to close the loan, or else the loan can be nullified, and lenders may foreclose on the property. If you have friends, relatives, or roommates living with you who are not on the loan paperwork may also be forced to vacate the home if you move out for more than a year because reverse mortgages require borrowers to live in the home as the primary residence.
- Seniors plagued with health issues may obtain reverse mortgages as a way to raise cash for medical bills. However, they must be healthy enough to continue dwelling within the home. If an individual's health declines to the point where he or she must relocate to a treatment facility, the loan must be repaid in full, since the home no longer qualifies as the borrower's primary residence.
PROS:
- If you die, you never pay back the loan. Your estate does. And your estate won't have to pay more than the value of the house.
- When you take out a reverse mortgage, you can take the money as a lump sum or as a line of credit anytime you want.
- If you will get enough proceeds from the loan to solve your financial problems, you plan to stay in your home long term, can afford the ongoing costs of homeownership, have a spouse who is 62 or older, and don’t plan to leave your home to anyone, a reverse mortgage may be a viable option for you.
If you're cash poor and a reverse mortgage seems like trouble, there are other options, such as selling your home and downsizing to a smaller and cheaper home. Homeowners may also consider renting properties, seeking home equity loans or home equity lines of credit, or refinancing with a traditional forward mortgage.
It’s important to research your options and potential impacts before moving forward with a reverse mortgage. If a reverse mortgage cannot provide the liquidity or large up-front sum you need, or there are long-term impacts you are uncomfortable with, you may be better off avoiding this complicated loan and looking for alternatives to ease your financial troubles.
Sources: BusinessInsider.com; Investopedia.com; thestreet.com
