Reverse Mortgages: Readers Share Their Experiences
There are certain real estate topics that seem to generate a fair amount of excitement and interest among our readers. One of those is a reverse mortgage.
A reverse mortgage allows homeowners aged 62 and older to convert their home equity into either a single lump sum or regular payments, which can be used to fix up the property or travel or even as a supplement to Social Security or other retirement income. Sometimes, a reverse mortgage is used to eliminate a traditional mortgage and free up cash flow for the homeowner.
Unlike a traditional mortgage, where you make regular monthly payments to pay off the loan over a specific period of time, a reverse mortgage requires no monthly payments. The amount due rises over time, and is paid off in full when the home is sold or the owner no longer lives there full-time.
Our recent article on reverse mortgages certainly got the attention of our readers. Wed like to share some of their comments :
I think financial advisers who work with clients nearing retirement should strongly encourage them to get a cash out refinance before they stop working . This would avoid the pressure to take out a reverse mortgage and leave their clients in a stronger financial position. This is what we ultimately did.
This is a far out idea , but in comparison with getting a reverse mortgage, it may be better to take a job long enough to qualify for cash out refinance .
How Do You Qualify For A Reverse Mortgage In Canada
The Canadian government makes it easy for senior homeowners to qualify for reverse mortgages. The five things lenders typically look at are:
Typically, as long as youre 55+ and have a home thats worth something, youll be approved for a reverse mortgage. Generally, the older you are, the larger amount of equity youll be able to borrow, as the lender foresees you having less time to spend it.
Fraud By Relatives Or Financial Planners
This type of reverse mortgage scam involves a crooked financial planner or advisor talking you into getting a reverse mortgage when you dont need one. They may tell you to let them handle your proceeds to invest them for you, but then use the money for their own financial gain.
Unfortunately, this can happen with relatives of the borrower as well. A loved one may convince you to get a reverse mortgage and give them the proceeds. Or they may coerce you into giving them power of attorney, which allows them to make financial decisions for you, including getting a reverse mortgage and putting the loan proceeds into their own accounts.
Also Check: Is It Better To Use A Mortgage Broker
How Do You Repay A Reverse Mortgage
You do not need to start making repayments on a reverse mortgage until after you move out of the house or die. When this happens, your family or estate may be able to repay the loan so they can keep the house. If they donât, then the lender will sell the house and use sale proceeds as repayment.
With most HECM loans, you are protected from owing more than what the home is worth when it is sold. For example, you take a reverse mortgage out on your home valued at $500,000. After a few years you pass away, and the loan balance exceeds the new appraisal value of the house. If your family and heirs want to keep the home, they typically need to pay off the appraised value of the house. If not, the mortgage lenders will sell it and only collect up to that new value .
Letâs say the opposite happens. The loan balance is much lower than the current appraisal value of the house, which has greatly appreciated. Your estate and your heirs can keep any money left after selling the house and repaying the lender. However, you should not count on this as a planning strategy, since the real estate market fluctuates, and it is never certain when the borrower might pass away or leave the home. In addition, the mortgage balance might be very high due to all the associated costs, which weâll discuss next.
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:
Lump sum payment: a single disbursement of funds
Term payments: funds are spread out over a set period of time
Tenure payments: funds spread out as long as you live in the home
Line of credit: draw on the loan amount as you desire
Combination: payments of either type plus a line of credit
Reverse Mortgage Lines Of Credit
Reverse Mortgage Lines of Credit are available at some Credit Unions in British Columbia and Ontario. A reverse mortgage line of credit functions like a reverse mortgage in that no payments are required until you sell your house, or you and your surviving spouse pass away. You may make payments of interest or interest and principal if you wish. The limit on the line of credit is based on similar criteria to the reverse mortgage: property value, geographic location, type of housing, and amount of current debt.
What Are The Pros Of A Reverse Mortgage
There are many advantages of taking out a reverse mortgage:
- You dont have to make any regular mortgage payments
- You dont have to prove your income in order to qualify
- The money you borrow is tax-free and does not affect your Old-Age Security or Guaranteed Income Supplement
- You can decide how you want to receive the money you can take it as a lump sum, a regular payment, or a combination of the two
- The money can be spent on whatever you want
- You get to maintain ownership of your property
- You dont have to pay back the loan or interest costs until you sell the home or pass away
You May Like: Who Should You Get A Mortgage From
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.
Very Low Property Value
On low-value homes, the closing costs will be a higher percentage of the homes equity compared to the same loan on a higher-priced home. For example, if the miscellaneous closing costs such as appraisal, title, and notary are $1,000 on a $100,000 home then that represents 1% of the homes value. However, on a $40,000 home that represents 2.5% of the home value. Consequently, seniors with low-value homes should look closely at the closing costs as a percentage of their homes equity.
Don’t Miss: How To Apply For A House Mortgage
Other People Living In The House With A Reverse Mortgage Might Have To Leave
Someone that decides to take a reverse mortgage needs to be at least 62 years of age. Other people might also live with the person that takes out a reverse mortgage. This could include friends or relatives. If the homeowner that takes out a reverse mortgage dies or moves out, other people living with them might also need to get out of the house.
The problem is a reverse mortgage requires the borrower to live in the home. A home that has a reverse mortgage needs to be the primary residence for the borrower. If other people living in a home with a reverse mortgage are under 62 and not listed on the loan, they will have to vacate the home when the borrower passes away or leaves.
Reasons Why A Reverse Mortgage Might Not Work For You
In addition to its downsides, there are three examples of when a reverse mortgage might be totally out of the question:
What Is A Reverse Mortgage Exactly
A reverse mortgage is a type of loan thats only available to senior homeownersages 62 and olderwho have plenty of home equity .
As with a second mortgage, a reverse mortgage allows you to access your home equity in the form of a lump sum, a line of creditor even a fixed monthly payment.
While reverse mortgages give seniors access to large sums of money, keep in mind, this means theyd be borrowing against their housemeaning theyd lose the house if something went wrong. If that sounds crazy, its because it is.
Pros And Cons Of Reverse Mortgages
They are a steady stream of income that lasts for years. You can convert the equity in your home into a pile of cash without having to move out.
The money is tax free. Rather than income earned, a reverse mortgage is considered a loan so the IRS cant get its sticky fingers on it. And a reverse mortgage will not affect your Social Security or Medicare payments.
As for the cons, failing to keep up with the monthly fees has cost a lot of people their homes. Of course, if they didnt pay those bills theyd also face foreclosure with a traditional loan.
The difference is that with traditional loan, the debt decreases every month. Since there are no mortgage payments with a reverse mortgage, the loan balance increases every month.
Between the interest and other costs, the debt may eventually exceed the homes market value. If you want your children to inherit the house, they could be stuck with a steep bill.
The good news is you or your estate will never have to pay a lender more than the market value of the house. The bad news is Uncle Sam got tired of paying the difference.
Since 2009, reverse-mortgage losses have cost the Federal Housing Administration reserve fund $12 billion. Thats the same fund that insures low-income newcomers to the housing market.
The average reverse mortgage borrower drew 64% of their equity under the old rules. That will drop to 58%, according to the Wall Street Journal.
You May Like: How Do You Refinance Your Mortgage
Times A Reverse Mortgage Is A Bad Idea
A reverse mortgage can be a very viable solution for the right homeownerone who is primarily seeking a way to effectively age in place.
Available to people who are age 62 or older and have built up a substantial amount of equity in their homes, reverse mortgages allow borrowers to wipe out their mortgage payments and can also serve as a means to generate additional cash flow in retirement.
But reverse mortgages are not right for everyone.
Here are some telltale signs that another financial solution may be a better option for you and your situation.
Veteran Reverse Mortgage Scams
Its important to remember that the VA does not currently offer any reverse mortgage loans and there are currently no reverse mortgages specifically for veterans. If someone is trying to sell you a reverse mortgage specifically for veterans or one that is offered by the VA, it is a scam.
If you are a veteran and having trouble making monthly mortgage payments, a VA refinance, or VA Interest Rate Reduction Refinance Loan , may help you lower your interest rate to make monthly payments more manageable.
Also Check: Can You Sell House Before Paying Off Mortgage
Your Spouse Lives With You But Does Not Qualify For A Reverse Mortgage
HUD Changed their rules in 2014 so that if your spouse is not 62 at the time you obtain a reverse mortgage, you can still get the loan in the name of the older spouse only.
The younger spouse is no longer forced to leave the home at the time of passing of the older spouse provided that the younger spouse was a non-borrowing spouse when the loan was originally taken out and that the spouse still resided in the home and the title passed to the remaining spouse.
Because they are no longer forced to leave, the age of the younger spouse will now be taken into consideration though to determine the benefit and borrowers with younger spouses will receive less money.
The thing that homeowners need to keep in mind though is that the non-borrowing spouse, while protected from having to move in the event of the passing of the borrowing spouse, is not a party to the loan and therefore does not have all the rights of a borrower on the transaction.
In other words, if there is still a line of credit available of $100,000 at the time the older, borrowing spouse permanently leaves the home, the younger, non-borrowing spouse does not have access to the funds on the line of credit.
Since they were never borrowed they would not be owed to the lender, but the remaining spouse would also not be able to access and use the funds.
I Would Like To Start My Review With
I would like to start my review with Neil Sharma our rep. He did a great job during the process. He provided great customer service at all times. He was readily available to answer any questions we had. Returned my calls and email and a timely manner. He made sure someone was looking after our file the few times he was called away from work. He understood about my mom’s lack of speaking English and thus recommended a great layer to help us out with that. He provided an update every few days. We did have hiccups along the way due to using a Power of Attorney and the lack of ID for my mom but Neil helped us through it all. He did not give up.He is passionate about helping his clients and his work. His customer service skills are top-notch. We developed a great working relationship. All in all the whole experience with your company has been a very good experience. The documentation is clear and well explained. Everyone I dealt with was professional, provided excellent customer service, and was very helpful. I will definitely recommend your company to friends and relatives.
Reply from CHIP Reverse Mortgage
You May Like: Does My Husband Have To Be On The Mortgage
No Plans To Bequeath Your Home
Some people dont choose to leave their home to anyone, except their spouse if they’re married. If you dont have childrenor your kids are financially successful and inheriting your home wont make a meaningful difference in their livesthen you probably have no specific plans for bequeathing the home.
Maybe because you worked hard to pay for your home, you just want to cash in your equity and spend it all before you die. Youre perfectly entitled to do so.
Upon your death , your loan becomes due and payable. Heirs who want to take possession of the house have the opportunity to pay the reverse mortgage balance to the lender and take back the title. However, they cant always do this. They may not have the cash or qualify to get a regular mortgage to buy your home.
If your heirs dont purchase the home, the lender will sell it on the open market to recoup the money it has lent you through the reverse mortgage. Any positive balance between the sale proceeds and what you owed goes to your estate. If theres a negative balance, Federal Housing Administration insurance covers it. So if youre not concerned about leaving your home to anyone, getting a reverse mortgage might be a good way to get cash.