Disadvantages Of Reverse Mortgages
If you are a caregiver for a senior who needs help at home, the proceeds from a reverse mortgage can be extremely helpful when it comes to covering the costs of in-home care. However, while reverse mortgage proceeds do not affect Medicare or Social Security retirement benefits, payments can affect eligibility for Medicaid and other need-based programs like Supplemental Security Income.
Long-term care Medicaid is a jointly funded state and federal program that assists impoverished seniors in paying for medical and long-term care. Anyone who applies for Medicaid must meet strict asset and income eligibility requirements before they are accepted into the program. If a senior elects to receive a large lump sum of cash from the equity in their home via a reverse mortgage, it can cause them to lose their eligibility for Medicaid services.
It is extremely important to consult an expert who understands the complicated Medicaid eligibility rules to avoid problems down the road. An elder law attorney can be very helpful when considering how reverse mortgage proceeds might affect Medicaid planning.
Additionally, there are both upfront and ongoing costs associated with a reverse mortgage. Closing costs and other fees must be paid either up front or over time. Costs may be paid up front out of the proceeds of the loan, leaving very little in the way of any out-of-pocket costs for seniors, however these costs are added to the loan balance.
Does A Reverse Mortgage Ever Make Sense
Reverse mortgages are widely criticized, and for a good reason they arent an ideal financial choice for everyone. But that doesnt mean theyre a bad deal for every homeowner, in every situation. Even if a reverse mortgage is an expensive option and not an ideal one, it may still be the best for your circumstances.
Is It Safe To Do A Reverse Mortgage
A reverse mortgage does not guarantee financial security for the rest of your life. You dont receive the full value of loan. The face amount will be slashed by higher-than-average closing costs, origination fees, upfront mortgage insurance, appraisal fees and servicing fees over the life of the mortgage.
You May Like: Reverse Mortgage Mobile Home
Are Reverse Mortgages Good For Seniors
Reverse mortgages have received a lot of press in recent years. Of course, there are pros and cons to using this option, and it may not be appropriate for everyone. Interestingly enough, two large organizations advocate their use, especially for seniors who need help funding their plans to age in place.
A study released by the National Council on Aging shows that 13.2 million Americans are candidates for reverse mortgages to pay for long-term care expenses at home, allowing many to remain independent and live in their homes longer. The Use Your Home to Stay at Home: Expanding the Use of Reverse Mortgages to Pay for Long-Term Care report funded by the Centers for Medicare and Medicaid Services and the Robert Wood Johnson Foundation concluded that reverse mortgages can alleviate financial pressure not only for individuals and families, but also for state Medicaid programs and the federal government.
Home Equity Conversion Mortgage
Home equity conversion mortgages, also known as HECMs, are government-insured loans backed by Federal Housing Administration . Just as you can get a government-backed FHA mortgage, you can get a government-backed reverse mortgage through the HECM program.
This reverse mortgage often has lower fees, since the government limits how much a lender can charge, and more payment options when it comes to receiving the loan proceeds.
The home equity conversion mortgage is the most common type, so weâll be focusing on this type of reverse mortgage.
Also Check: Rocket Mortgage Requirements
Explore All Your Options
On its surface, a reverse mortgage might sound like an ideal way to use your home for income. However, both upfront and ongoing costs accompany a reverse mortgage, along with a variable interest rate. Another pitfall: Because interest and fees are tacked on to the loan balance each month, the balance increasesâand as the balance goes up, your home equity goes down.
Because of the numerous downsides to reverse mortgages, be sure to explore all of your borrowing alternatives to ensure your finances don’t end up going in reverse.
Have Better Cash Flow
When you get to pay off existing debts, it will help reduce your monthly costs significantly. In turn, it will help improve your cash flow to make for more financial flexibility. Borrowers who live on fixed incomes use a reverse mortgage to improve their cash flows because it lowers their monthly costs and helps them avoid missing out on debt payments.
You May Like: Does Chase Allow Mortgage Recast
You Can’t Afford The Costs
Reverse mortgage proceeds may not be enough to cover property taxes, homeowner insurance premiums, and home maintenance costs. Failure to stay current in any of these areas may cause lenders to call the reverse mortgage due, potentially resulting in the loss of one’s home.
On the bright side, some localities offer property tax deferral programs to help those age 65 and over with their cash-flow, and some cities have programs geared toward helping those age 65 and over with fewer comparative resources with home repairs, but no such programs exist for homeowners insurance.
Alternatives To Reverse Mortgages
- For those requiring financial resources for a short period of time, a HELOC or Home Equity Line of Credit might be a better option.
- In certain areas of the country with higher property values, a Unison Homeowner Agreement is an alternative option.
- Elder care loans are also available for short term needs. For example, while waiting to sell a home.
- There is also financial assistance for eldercare. Search for programs here.
As of October of 2010, there were 2 types of reverse mortgages the standard Home Equity Conversion Mortgage and the newly introduced Home Equity Conversion Mortgage Saver, referred to as HECM Standard and the HECM Saver for short. The difference, in brief, is that the HECM Saver has lower upfront costs and is better for persons seeking a shorter term mortgage. The HECM Standard has higher upfront costs but allows persons to borrow a larger percentage of their homes value in the mortgage.
In most cases, the HECM Savers lower upfront costs make it more appropriate for persons wishing to use the proceeds from a reverse mortgage to pay for long term care.
A Historical NotePrior to the financial crisis of 2008, there were 3 types of reverse mortgages the HECM Standard, the Fannie Mae Home Keeper® and Jumbo Reverse Mortgages. The Fannie Mae Home Keeper® was discontinued and Jumbo Reverse Mortgages, for higher value homes, became more or less obsolete as the government increased the limit on how much can be borrowed with the HECM Standard.
You May Like: Does Chase Allow Mortgage Recast
What Are The Benefits
Reverse mortgages were conceived as a means to help retirees with limited income use the accumulated wealth in their homes to cover basic monthly living expenses and pay for health care. However, there are no limitations regarding how the reverse mortgage proceeds can be used.
The loan generally does not have to be paid back until the last surviving homeowner dies or moves out of the home. After this happens, the estate will sell the home and use the proceeds from that sale to repay the reverse mortgage loan.
Magazine Offers 4 Signs A Reverse Mortgage Is A Good Idea
Due to the often-cited impending silver tsunami of incoming American retirees and metrics which suggest that retirement savings are stagnating, the amount of seniors looking for alternative ways to supplement their cash flow in their post-working years shows signs of accelerating, and one possible way forward for seniors in the right situation could be with a reverse mortgage.
This is according to an article published by Harlem World Magazine, which details four specific signs that could indicate why a reverse mortgage may be a good idea worthy of consideration for seniors in a few particular kinds of financial situations at or near retirement.
The first of the four signs is if a senior considers themselves property rich but cash poor, meaning that the amount of equity a senior has built up in their home meets or exceeds the amount of cash they have on-hand.
Unfortunately, they are often rich in name only, the article says. They would have to sell their property to benefit from the massive appreciation and value. They might still struggle to come up with the cash that they need to pay their bills regularly. In some cases, it might feel that the increase in property value is actually an inconvenience because you have to pay more on property taxes and insurance.
You can get a lot of money with your reverse mortgage if you have a valuable house that is paid off and dont intend on selling it in the near future, it says.
Read the article at Harlem World Magazine.
How To Repay The Money You Borrow
You don’t need to make any regular payments on a reverse mortgage. You have the option to repay the principal and interest in full at any time. However, you may have to pay a fee to pay off your reverse mortgage early.
You have to repay the amount left owing when:
- you sell your home
- you default on the loan
You could default on a reverse mortgage by:
- using the money from the reverse mortgage for anything that is illegal
- being dishonest in your reverse mortgage application
- letting your home fall into a state of disrepair that would lower its value
- not following any conditions in your reverse mortgage contract
Each reverse mortgage lender may have their own definition of defaulting on a reverse mortgage. Ask your lender what could cause you to default.
When you die, your estate has to repay the entire amount owing. If multiple individuals own the home, the loan has to be repaid when the last one dies or sells your home.
The amount of time that you or your estate has to repay a reverse mortgage may vary. For example, if you die then your estate may have 180 days to pay back the mortgage. However, if you move into long-term care, then you might have one year to pay it back. Make sure you ask your lender for information about the timing for paying back a reverse mortgage.
When Is A Reverse Mortgage A Good Idea
Reverse mortgages are best for homeowners who plan to stay in their home for the rest of their lives. Ideally, your heirs will be able to sell the home after your death and pay off the loan with the proceeds. However, you should know that this will cut into their inheritance. You should always weigh a reverse mortgage against other options that don’t involve additional debt later in life.
Don’t Miss: Rocket Mortgage Vs Bank
How You Can Use A Reverse Mortgage
Reverse mortgages give you the flexibility to use your home equity in a number of different ways. With a Home Equity Conversion Mortgage you can:
- Pay off your current mortgage and other expenses to reduce your monthly expenses
- Remodel your home to accommodate changing health and age limitations
- Keep a line of credit for unexpected expenses and financial emergencies
- Pay for health insurance until youre eligible for Medicare coverage or Social Security income
- Supplement your retirement income
- Pay for long term care and health needs
- Pay for transportation if youre unable to drive
- Pay for a child or grandchilds college or professional education
Who Is A Bad Candidate For A Reverse Mortgage
There are plenty of signs that a reverse mortgage is not a good choice:
- If youre planning to move Remember that you need a long runway to make paying all the closing costs, mortgage insurance premiums and other fees worth it. So, if you think you might want to relocate to a new destination or downsize to a smaller place anytime soon, steer clear of a reverse mortgage.
- If you might need to move due to health issues A reverse mortgage requires you to live in the home, which means that relocating to a nursing home or any kind of assisted living arrangement could result in needing to pay back the loan. If youve been concerned about health issues, its probably wise to avoid a reverse mortgage.
- If youre struggling to cover the other costs of your home One of the key components of a reverse mortgage is your ability to pay your property taxes and homeowners insurance. If youve faced challenges coming up with the cash for these essential costs, adding to your debt should not be on the table.
Also Check: Rocket Mortgage Loan Types
Youre Protected If The Balance Exceeds Your Homes Value
Because a reverse mortgage balance grows in size, its 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 propertys value, because a reverse mortgage is an example of non-recourse financing. The result is that a mortgage lender can have no claims against your other assets, or heirs, in this scenario.
What Factors Should I Consider
A reverse mortgage is not for everyone. You still have to meet certain conditions, and failing to meet these conditions will allow the lender to foreclose. You may not want a reverse mortgage if:
You want your heirs to inherit your home.
You live with someone.
You might move soon.
You cant afford ongoing costs, such as home maintenance, property taxes, or homeowners insurance.
As a reverse mortgage borrower, you are required to live in the home and maintain it. If the home falls into disrepair, the lender wont be able to recoup the full amount it has extended to the borrower. If you dont pay your property taxes, your local tax authority can seize the house. If you dont have homeowners insurance and theres a house fire, the lenders collateral is damaged. Keep in mind, the lender will impose these requirements to protect its interest in the home.
All loans must eventually be repaid, and this one is no different. The loan is due once the borrower sells the home or passes away.
Don’t Miss: 10 Year Treasury Vs Mortgage Rates
You Wont Pay Taxes On The Money You Receive
When youre working out how to manage retirement income in a tax-efficient manner, a reverse mortgage can help. You wont have to pay taxes on the money you receive in payments from the lender.
On top of that, because the IRS considers a reverse mortgage a loan, not actual income, it also wont be counted in formulas that use your income, such as impacts to your Social Security and Medicare benefits.
Talk To A Mortgage Expert You Can Trust
Before you make any decisions on a reverse mortgage, speak with an expert who knows the ins and outs of everything to do with mortgages. Our trusted friends at Churchill Mortgage will equip you with the information you need to make the right decision.
About the author
Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners.
Also Check: Does Getting Pre Approved Hurt Your Credit
How Does Your Payment Method Determine How Much Youll Get Paid
On the surface, it doesnt seem like the payment method would affect how much you can get. However, getting paid out in one lump sum versus monthly payments could affect the principal amount of your loan. Keep reading to understand why.
Getting the entirety of your reverse mortgage amount all at once means you could be giving up some money in the future, whereas both the fixed monthly payment option and the line of credit option could pay out more to you over time if your home value goes up.
How A Reverse Mortgage Works
Before getting a reverse mortgage, you must first pay off and close any outstanding loans or lines of credit that are secured by your home. These can include a mortgage and a home equity line of credit . You can use the money you get from a reverse mortgage to do this.
You can use the remainder of the loan for anything you wish, such as to:
- pay for home repairs or improvements
- help with regular bills
- cover healthcare expenses
- repay debts
A reverse mortgage may limit other financing options secured by your home. You may not be able to take out a HELOC or similar products.
You may be able to get the money from your loan by:
- taking the money as a one-time lump sum
- taking some of the money up front and taking the rest over time
Ask your lender what payment options they offer for a reverse mortgage. Also ask whether there are any restrictions or fees.
How To Get A Reverse Mortgage If Its Right For You
If youve considered all the pros and cons and believe a reverse mortgage will be good for you, follow these steps to get one: