Does A Reverse Mortgage Make Sense For Seniors
A reverse mortgage may sound like a good deal for cash strapped seniors. You can turn some of your home equity into cash without having to sell your house. The money you borrow is tax-free income, and you dont need to make regular payments on the loan.
Some financial experts advise seniors to avoid reverse mortgages and instead explore other options for retirement income. Before you consider a reverse mortgage its important to understand how they work, what fees are involved, and some of the pitfalls to avoid.
How Do Reverse Mortgages Work
A reverse mortgage gives you access to funds without sending you an immediate bill.
Consider this math: With a traditional mortgage, if you borrow $100,000 at 3.4 percent fixed interest for 30 years, youll have a $443.48 monthly payment . If you borrow $100,000 with a reverse mortgage, your required monthly payments for principal and interest are zero.
Too good to be true? Well, yes. You will still owe money. You just wont have to pay it back until you sell the home, move out or die. If the latter is the end of your reverse mortgage, the payoff responsibility falls on your spouse or heirs who may need to sell the home.
With our example $100,000 mortgage, the borrower pays about $443 each month. Of this amount, around $160 is paid toward principal in the first month to reduce the loan balance. The rest of the payment approximately $283 is interest, or what the lender charges you for loaning you money. The payment plan continues like this every month, with more of the payment going to the principal and less to interest over time, until the loan term is up.
How Do You Repay A Reverse Mortgage
You do not have to repay a reverse mortgage unless you are selling the home, are residing outside the home for more than a year, or pass away. If selling, you can use the proceeds from the sale to pay off the reverse mortgage. If the reverse mortgage comes due as a result of residing outside of the home, even involuntarily because of medical needs, you may not have the funds to pay off the reverse mortgage and may lose your home. This is one of the biggest risks in a reverse mortgage. In the event of your passing, your heirs will be responsible for paying off the reverse mortgage with other funds from your estate, their own funds, or proceeds from the sale of the home.
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Reverse Mortgages Impact On Other Government Benefits
Reverse mortgage payments are not counted as income if they are spent on care in the same month as they are received.
As most elderly persons receive multiple benefits from the federal government, one should not consider a reverse mortgage independent of its impact on other benefits. Fortunately, the most common benefits, including Medicare and Social Security, are not impacted in any way by a reverse mortgage. However, Supplemental Security Income, Medicaid, and Veterans Pension eligibility may be affected. These vary state-by-state. But generally speaking, reverse mortgage payments are not counted as income, as long as they are spent in the same month as they are received. However, if the funds are allowed to accumulate month over month, they could push ones resources over the allowable limits.
With Chip Reverse Mortgages In Canada Our Loan Balance Will Not Exceed The Fair Market Value Of Your Home
Regardless of market fluctuations, CHIP Canada Reverse Mortgage lender guarantees, no matter what, that the loan balance will not exceed the fair market value of the home. In other words, you can never owe the lender more than the value of the home. Low-interest rates in these types of loans reflect the confidence that a Lender feels in their exposure to loss due to market value fluctuations. Entering into a CHIP Reverse Mortgage in Canada is a great option for a senior who needs access to their homes equity but doesnt want to make payments or be concerned about their debt exceeding the value of their home.
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Pay For Leisure Activities
You can use your reverse mortgage to engage in leisure activities in retirement or enhance your lifestyle. This could include travel to various destinations local or abroad or indulge in favorite hobbies, which may require monetary investment.
If you choose to take out a reverse mortgage loan, you keep the deed to the property. You only have to give up ownership of the house if/when you move out or sell the property. You can stay as long as you stay current on your taxes, maintenance and insurance. Theres no maximum length of time that you can live there.
What Is A Reverse Mortgage
How does a reverse mortgage work?
How can I qualify for a reverse mortgage?
What is a reverse mortgage?
These are just some of the questions that can arise while considering a reverse mortgage. A reverse mortgage is a financial product that allows Canadian seniors to tap into the equity that theyve accumulated in their home. For many people, that equity is their largest single asset. Homeowners can access only up to 55 percent of their home equity as reverse mortgage, as long as they remain in that home. The exact amount a homeowner will receive depends on the property type, location, the homes value, and the age of the applicant.
To qualify for a reverse mortgage in Canada, homeowners must use the residence as their primary home, maintain the property is good standing, stay up to date with insurance, continue to pay property tax and pay off any outstanding debts secured with the home with the proceeds from the CHIP Reverse Mortgage. Unlike other mortgages and loans, there is no health check or minimum income required with a reverse mortgage.
You will never be forced to sell or move as a result of changing home values or earning. The amount that you or your estate eventually has to repay will never exceed the fair market value of your home at the time it is sold. Theres no reason your home should ever be a burden to you or your family. The loan will be recalled only if the last homeowner passes away or moves out of the home.
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How To Receive Funds From A Reverse Mortgage
You can get the loan proceeds from a home equity conversion mortgage in one of the following payment methods:
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Lump sum payment: a single disbursement of funds
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Term payments: funds are spread out over a set period of time
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Tenure payments: funds spread out as long as you live in the home
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Line of credit: draw on the loan amount as you desire
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Combination: payments of either type plus a line of credit
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How Much Money Can You Get From A Reverse Mortgage
Age plays a big part in determining how much money a person can receive. Older borrowers will typically receive more money, but the FHAs current lending limit for HECMs is $765,600.
With a reverse mortgage, interest is added to the loan balance each month, and the balance grows. Borrowers receive less than the value of the home, to account for interest charges. A reverse mortgage generally doesnt exceed 80 to 85% of the value of the home, but is largely based on the borrowers age at the time of the loan, Ash says.
In addition to age, the amount of the reverse mortgage loan also depends on current interest rates and the value of your home: This reverse mortgage calculator provides a free estimate of the amount of money you may receive based on your age, ZIP code, and home value.
Corporate Upheaval Has Marked Reverse Market
As reverse mortgages exploded in popularity from 2001 to 2009, three lenders originated a third of the new loans nearly 200,000 in all.
Since then, Bank of America and Wells Fargo have exited the market and the second largest lender, Financial Freedom, faced massive federal penalties related to false reverse mortgage insurance claims as it was sold to other banks.
In their wake, the market began to fragment. The top two lenders California-based American Advisors Group and One Reverse Mortgage together account for about one in five new loans.
Around 1997, something else had started to shift. Until then, residents in African American ZIP codes had received fewer than 200 reverse mortgages per year. But, the HUD data shows, the number and percentage of loans to residents of black neighborhoods accelerated. Throughout the 2000s, they took on the loans at two to three times their share of the population.
Small-volume lenders such as Best Mortgage Services in Detroit and Gateway Reverse Mortgage Group in St. Louis wrote 81% and 63% of their loans respectively in neighborhoods that are predominantly black.
The figures surprised Jonathan Teal, former owner of Gateway. He folded the company in 2011 in the wake of the Dodd-Frank Act, which he said overregulated lending.
The company routinely sent out 10,000-piece direct mail campaigns that blanketed the St. Louis metro area, Teal said. He said his company did not target specific neighborhoods or races.
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The Other Side Of The Coin: Reverse Mortgage Risks/dangers
- Even after taking a reverse mortgage, you still have to pay the property taxes insurance premiums and other home maintenance costs.
- If youre unable to make these payments, your home might get foreclosed.
- You have to pay a lenders fee along with underwriting fees, appraisal fees, credit checks etc.
- In order to avail the loan, you must own the home fully.
- You have to spend the money that you receive or else it could be considered as an asset and this might affect Medicaid payments.
- If you move out of your house for any purpose, say hospitalization, you might have to repay the amount.
- There is a loan limit of $679,000 in case of the HECMs so you cannot tap into it for more, even if you have a bigger home equity.
- Are reverse mortgages safe? One of the reverse mortgage dangers is that seniors enter the agreement without being aware of all the terms. They are not able to renegotiate later on and feel that the interest on reverse mortgage rates are rather high. Another problem is that it becomes a problem to your heirs, as the loan is due as soon as the person is dead.
Make Improvements To Your Home
Keeping up with your homes maintenance is essential to having a safe and secure living environment. If youve had to put off things like replacing your roof or replacing your heating system, the funds from your reverse mortgage loans can help make these essential updates possible. Canadian seniors can also use their loan proceeds for other upgrades, such as adding a deck, replacing countertops and/or remodeling the kitchen.
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Knowing The Basics Of Reverse Mortgages
Knowing the different types of reverse mortgages can be beneficial when it comes to making the selection that fits you best. We will get into each kind in detail. There are a few details, however, that lenders will generally look for. These are:
- Your age as well as the age of your spouse if they are listed on the title of your house
- Where you live
- The condition of your home, its type, and its appraised value
A good rule of thumb to consider is that the older you are and the more equity you have in your home, the more money that you could get. This is, of course, impacted by current market trends, so keep that in mind. You could even use the money from the reverse mortgage to do this.
If there is a remainder left, you can use it for a wide range of things like:
- help with regular bills
- pay for home repairs or improvements
- repay debts
There is a lot of flexibility when it comes to how you spend your loan, making it one of the more versatile options out there.
If you want to learn the plain facts on reverse mortgages, there are a number of great resources available online, including information from the Financial Consumer Agency of Canada.
Quick Facts For Those Considering Reverse Mortgages
- Homeowners can never owe more than their homes value.
- Lenders cannot force seniors out of their homes.
- Loans become due when the last borrower sells the home, moves out of the home for 1 year or passes away.
- Reverse mortgages do not affect ones Medicare or Social Security benefits but can potentially impact Medicaid eligibility.
- Reverse mortgages can be re-financed therefore a down real estate market should not be a consideration factor.
- Closing costs are from 2% 8% of the loan amount.
- Between 20% -70% of the homes value can be borrowed.
- There are no restrictions on how the money can be used.
For more information about reverse mortgage companies, check out our review.
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Is A Reverse Mortgage Expensive
Home equity conversion mortgages , the most common type of reverse mortgage, bring a number of fees and costs. Some are one-time fees, and some are ongoing costs.
Before even taking on the reverse mortgage, all borrowers taking out a HECM reverse mortgage loan must undergo counseling from a U.S. Department of Housing and Urban Development -approved reverse mortgage counselor. Counseling costs will vary, depending on the agency and the borrowers specific circumstances. Other fees include origination fees, closing costs, and mortgage insurance premiums. Youll also have to pay servicing fees to the lender for costs such as sending account statements, distributing loan proceeds, and making certain that you keep up with the loan requirements.
What Happens If I Change My Mind And Dont Want The Loan Anymore Is There Anything I Can Do
You have three calendar days in which you can change your mind and cancel the reverse mortgage. This is known as a three-day right of rescission. Lenders might have different processes when it comes to canceling a loan, so its best to discuss this up front.
Reverse mortgage loans, a previously misunderstood financial product, is a smart way of accessing funds for your retirement. In fact, once you comprehend its many advantages, youll be wondering why people dont have one.
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You Have To Pay For It
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. Youll also be paying pesky servicing fees each month that can be as high as $35 if your interest rate adjusts on a monthly basis.
Dean Of The Ubc Peter A Allard School Of Law Appointee
Dr. Toby Susan Goldbach is an Assistant Professor of Law at the University of British Columbia, Peter A. Allard School of Law. She received her BA from McGill University, her JD and an LLM specializing in Dispute Resolution from Osgoode Hall Law School, and her doctoral degree from Cornell University Law School, where she was the Rudolf B. Schlesinger Fellow in International and Comparative Law. Dr. Goldbachs research and teaching interests sit at the intersection of dispute resolution and legal procedure, comparative law, and legal anthropology.
Dr. Goldbachs research is informed by her experience serving as Senior Law Clerk to Chief Justice Patrick LeSage at the Superior Court of Justice and as a lawyer at the Ministry of the Attorney General Civil Justice Policy and Reform branch. Her writing also relies on research conducted at the World Banks Law, Justice and Development Week meetings of the International Organization for Judicial Training the opening ceremonies for the Aboriginal Conference Settlement Suites and consolidated courthouse in Thunder Bay, Ontario and field research at the Supreme Court of Israel. Her research has been published in Law and Social Inquiry, the Annual Review of Law and Social Science, and the Indiana Journal for Global Legal Studies. Dr. Goldbach is co-chair of the Law and Society Association collaborative research network on Innovations in Judging.
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Small Issues Snowball For Senior
Leroy Roebucks loan is held by Reverse Mortgage Solutions, but his experience follows the twists and turns in the industry.
When Roebuck forgot to pay his insurance bill in 2010 and it cascaded into a foreclosure proceeding, Bank of America was his lender. Responding to the missed payment, the bank took out its own insurance policy for $5,000 on the home and added the bill to his loan balance.
What Is A Reverse Mortgage For Seniors
A home reverse mortgage is a type of mortgage loan product that allows eligible borrowers to convert a portion of their home equity into loan proceeds that can be used as a source of retirement cash flow. Reverse mortgages are also commonly called home equity conversion mortgages or HECM loans, the name for the federal program that insures a large portion of reverse mortgages.
- Did you know that almost half of adults over the age of 55 have no retirement savings? If youre worried you dont have enough saved up, a reverse mortgage may help. Read our guide to find out how long your retirement savings will last.
Reverse mortgages differ from traditional mortgages. While borrowers make monthly payments on a traditional mortgage, no monthly payments are required on a reverse mortgage during the course of the loan instead, payments are made to the borrower.
Throughout the course of the loan, the home is used as collateral. The loan must be repaid when it reaches a maturity event that signals its Due and Payable status usually, this is the death of the borrower or the borrowers departure from the property. Until a maturity event, borrowers continue living in the home while enjoying proceeds secured by their home equity all without the requirement of monthly repayments.
If you think a reverse mortgage may be suitable for your retirement, its important to review eligibility requirements.
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