Money From A Reverse Mortgage Is Not Free
All banks and lenders are in business to make money and reverse mortgage lenders are no different. But sometimes someone will ask why they have to pay interest to borrow their own money. Here is what I tell them:
A reverse mortgage is a loan against the equity in your home. Anyone who loans money will charge interest. This works no different than any other loan against your home. Whether its a normal 30 year fixed rate loan or a HELOC, the company loaning you the money will charge interest on the loan.
In the case of the reverse mortgage, the lender defers the interest until the last homeowner permanently leaves the home. When you no longer live there as your primary residence, the loan balance plus all accrued interest and MIP charges are due at that time.
A Reverse Mortgage Will Chew Up All Of Your Equity And You Will Have Nothing Left For Your Heirs In Addition To That You May Need It In The Future To Pay For Health Care Costs
This is one of the most common objections that people have against doing a reverse mortgage. If keeping as much equity in your home as possible is very important to you, then I recommend that you do NOT take out a reverse mortgage.
One of the things I tell every single person that is considering a reverse mortgage is the following:
Every month you will receive a statement that will show the amount of interest and mortgage insurance that has been charged to your account. Your balance will get larger each month, not smaller. So if looking at this statement and seeing the balance grow is going to cause you more stress than having the reverse mortgage relieves, then dont do the reverse mortgage! This loan is meant to RELIEVE financial stress, not create more.
I have closed well over 650 reverse mortgages since 2003 and have never, ever had a customer, or an heir, tell me that they regret taking out their reverse mortgage. The reason is that I am very clear with people about this point.
If someone is not OK with the thought that they might use up all of their equity, then I dont take an application from them to begin with. I will never talk someone into taking a reverse mortgage if they dont feel 100% OK with this.
Having said all that, I dont completely agree with this reverse mortgage con. Since we dont loan anywhere near 100% of the value of the home, odds are that there will probably some equity left.
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Tips For Taking Negative Ego Out Of Reverse Mortgage Sales
While the word ego can often come with negative connotations, there are positive aspects to it that can be important, and which should be accentuated for people who are in positions related to sales. This can be especially important for those aiming to sell reverse mortgages, since a good sales strategy in selling products dedicated to equity release involves projecting confidence without projecting arrogance to seniors.
This is according to Tabatha Addison, VP of sales and development of the wholesale division at American Advisors Group , during a presentation at the National Reverse Mortgage Lenders Association Annual Meeting in Nashville, Tenn. last week.
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Is A Reverse Mortgage A Good Idea
Lots of folks wonder if a reverse mortgage is a good idea. Unfortunately, many shady loan companies took advantage of seniors and bilked them out of money years ago.
For this reason, this kind of loan has gotten a bad wrap over the years. Those days are over. A seniors mortgage is a good loan for those who need the money and are no longer working.
Advantages Of A Reverse Mortgage
The main advantage of Reverse Mortgages is that you can eliminate your traditional mortgage payments and/or access your home equity while still owning and living in your home. Given the right set of circumstances, a Reverse Mortgage can be an ideal way to increase your spending power and financial security in retirement.
Key advantages and benefits of Reverse Mortgages include:
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Reversible Mortgages Provide You With Income
A reverse mortgage is a loan based on age, home value, and current interest rates. If you have a lot of equity in your home, this kind of mortgage can provide you with a good amount of money.
When you get a reverse mortgage, you can get your money in the form of regular monthly payments or as a lump sum. You can then use the money to pay for your expenses or anything else you choose to spend it on.
You can also get a reverse mortgage line of credit for additional funds when needed.
Cons Of Reverse Mortgages
Reverse mortgages arent perfect. They come with significant risk, and when used improperly, a reverse mortgage could lead to losing your home to foreclosure or your heirs being left with very little when you pass on. They also come with fees and could impact your ability to earn other retirement income and benefits.
When do these drawbacks come into play, exactly? Here are five scenarios when you wouldnt want to use a reverse mortgage.
You or your heirs want to keep the property in the family.
Reverse mortgages arent ideal for your loved ones to inherit. While your heirs can pay off the loan out of pocket if they dont want to sell the house, thats probably not a decision you want to leave behind for those you loved the most.
So, if your home is one youve had for decades or your ancestors poured their blood, sweat and tears into, a reverse mortgage may not be the best solution.
You think youll move out of the home in the next few years.
Reverse mortgages come with many upfront costs. There are closing costs, origination fees, upfront mortgage insurance premiums, appraisal costs and servicing fees. The origination fee itself can go as high as $6,000 for HECMs. Altogether, it can add up to tens of thousands of dollars in some cases.
You rely on SSI or Medicaid.
Youre already struggling financially.
If youre having a hard time paying the bills, downsizing rather than leveraging your home equity is probably a safer bet.
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Con: Fees And Interest
Like any loan, theres interest and fees on a reverse mortgage. Many lenders charge an origination fee or closing costsor both. There may also be servicing fees during the course of the loan. And depending on whether you open a HECM or a proprietary reverse mortgage, there may also be insurance premiums that are added to your loan balance each month.
The Positive And Negative Sides Of Ego
For instance, if a person is confident, that can lead to them being decisive when faced with an important decision, and courageous in pushing a business forward, she said. Its a conscious choice, however, to try and mitigate the negative attributes of confidence, including being perceived as closed-minded, domineering and intimidating.
Sometimes, those negative aspects associated with a part of a persons ego can come out in ways that affect the larger business that the salesperson is a part of.
There can be costs of ego to an organization, Addison said. Ego can cost an organization a lot of money because it can attach certain ideas to a persons identity.
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How Do You Pay Back A Reverse Mortgage
You need to pay back a reverse mortgage when you move out of the house or sell the house. A reverse mortgage also needs to be paid when you pass away. In the latter scenario, your estate or the person you bequeathed the property will be responsible for repaying the lender.
In the event you leave behind a non-borrowing spouse when you pass away, the loan may or may not come due. This will depend on the type of reverse mortgage you have, when you took out the loan and whether the spouse meets the eligibility requirements of the loan.
It Could Impact Your Other Retirement Benefits
A reverse mortgage may not be considered income for tax purposes, but it could impact your ability to qualify for other need-based government programs such as Medicaid or Supplemental Security Income . Itâs a good idea to discuss this with a benefits specialist to make sure your eligibility wonât be compromised.
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Reversible Mortgages Provide Supplemental Security Income
An excellent way to think about a reverse mortgage is a possible way to finance your retirement years. Reverse mortgages provided cash-strapped individuals a way to tap their homes equity when they have limited income.
The following information will help you understand a reverse mortgages main pros and cons. Educate yourself and consider your options carefully before you make a decision one way or the other.
You can choose the right action for your specific situation and needs by being informed. The information provided will be everything you need to know about reverse mortgages.
The Cons And Pros Of A Reverse Mortgage
The Cons and Pros of a Reverse Mortgage A reverse mortgage is a valuable retirement planning tool that can increase retired income flows by using your greatest asset: your home. A reverse mortgage allows homeowners to borrow against their homeâs equity while still maintaining ownership of the home.
The best part of a reverse mortgage is that, unlike conventional mortgages, there are no payments involved. Instead, the lender makes payments to the borrower, either through a single payment, monthly payments, or a line of credit.
The reverse mortgage is paid when the borrower dies, permanently moves out of the residence, or the property is sold. Instead of paying the monthly bill and the value of your growing house, the bank pays you monthly, and equity can shrink. It is important to know that you must be 62 to qualify.
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Bottom Line: Should You Get A Reverse Mortgage
Reverse mortgages have gained a less-than-perfect reputation thanks to some scams that target unsuspecting seniors. Even legitimate companies have used dishonest marketing to try to get homeowners to take out reverse mortgages: Recently, the Consumer Financial Protection Bureau filed a complaint and levied a $1.1 million fine against American Advisors Group, one of the biggest names in reverse mortgages, for deceptive marketing.
So, the simple rule: Be very, very cautious about putting your home at risk.
Still, there are two key reasons that seniors might consider examining their reverse mortgage options today:
- Elevated equity Over the past decade, home equity has grown as home values have risen. The average American homeowner gained more than $56,000 in equity between the third quarter of 2020 and the third quarter of 2021, according to CoreLogic.
- Record-low interest rates While interest rates are beginning to rise and will likely continue on that path in 2022, its still a cheap time to borrow money. Interest rates on 30-year loans are currently estimated to stay below 4 percent throughout the next year.
Remember that you have other options to access cash, too. Compare a home equity loan versus a reverse mortgage to see which one is a better fit for your needs.
With additional reporting by David McMillin
What Are The Advantages Of A Reverse Mortgage
- You continue to own your home. The lender cant ask you to sell or vacate it in order to repay the loan. You must, however, continue to pay the property taxes, maintenance costs and insurance.
- You can use the borrowed amount to maintain your lifestyle by, for example, paying yourself an annuity.
- The lender will not require any payments from you while you are living in your home. You may, however, repay some or all of the interest every year.
- As long as you comply with your mortgage obligations, including paying your municipal taxes and insurance, the lender will usually guarantee that youll never have to pay back more than the value of your property.
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Calculator For A Reverse Mortgage
With a reverse mortgage calculator, you will be able to determine the mortgage amount you may qualify for based on things such as your home value, age, and any existing mortgage balance. The loan estimate received will be based on HUDs principal limit factor, your age, and your homes value.
At present, HECM loans have a limit of $822,375. AAG has an excellent mortgage calculator you can use for reverse mortgages. AGG is also a reputable reverse mortgage lender worth speaking with. They are one of a handful of mortgage lenders who provide reverse mortgage loans from $625,000 up to 4 million.
If you need a significant loan, you might also want to look for a jumbo reverse mortgage, although they are harder to come by. Reverse mortgage loan limits have increased for five years in a row.
Your Home Can Still Be Foreclosed
One of the most common misconceptions about reverse mortgages is that a lender cant foreclose on the property because they pay the homeowner to live there. However, if the homeowner fails to pay property taxes, keep an acceptable home insurance policy, or pay regular HOA fees, the bank reserves the right to start foreclosure proceedings.
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Understanding Interest Rates And How Interest Accrues
HECM reverse mortgages are either fixed rate or variable rate. Fixed rates require a one time lump sum draw at closing. The rate will then be fixed for the life of the loan. Variable rates are open ended credit, meaning proceeds can be taken as cash at closing, a monthly payment, line of credit, or a combination of all. The most popular variable rate is the HECM Annual. It will adjust once per year and has an annual adjustment cap of 2% and a lifetime cap of 5%. That means that they rate can never adjust more that 2% per year and will never go higher than 5% above the initial starting rate.
Interest on a reverse mortgage will accrue on an annual basis. Remember that reverse mortgages do not require a monthly payment.* Any unpaid interest is added to your loan balance over time. Its important to note that interest on a reverse mortgage does compound. Its always advisable to review the amortization schedule in the paperwork provided by your lender to see how the loan balance grows over time.
*The borrower is responsible to pay property taxes, homeowners insurance and any other charge associated with the property.
Who Is A Good Candidate For A Reverse Mortgage
With all the potential complexities and risk of putting your home on the line, is a reverse mortgage actually a good idea? For some homeowners, the answer might be yes:
- If you anticipate staying in your home for a long time Since youll pay another set of closing costs with a reverse mortgage, you need to stay in the home long enough to justify the expense. So, if youre 62, have a history of longevity and believe your current place is your forever home, a reverse mortgage could make sense. Plus, if you live in a market where home values are appreciating at a fast clip , your property may be worth plenty more by the time you or your heirs pay back the loan.
- If you need more money to manage everyday expenses If youve found yourself struggling to manage the expenses of retirement, a reverse mortgage can help give you liquid cash to help deal with those responsibilities.
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Who Owns The House In A Reverse Mortgage
As with other mortgage products, a reverse mortgage doesnt impact your title its simply a loan secured by the home. You still own the property, and your name is on the title and deed. The lender wont take ownership of your home unless you fail to meet the loans requirements or you pass away, and your heirs or estate cannot repay the balance.
Important Discussions To Have With Your Spouse Heirs And Anyone Else You Feel May Be Affected By Your Decision
We always recommend that you discuss your decision with your family, heirs and anyone else that you feel could aide you in your decision. Below is a list of topics that we feel are important and you should consider discussing:
- Maintaining financial independence
- Staying in your home and aging in place
- Estate planning and impacts of the reverse mortgage
- Loan repayment requirements for you and your heirs
- Impact on Government benefits
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Access To Line Of Credit
Your client will have the opportunity to repay a portion of their loan balance and borrow it back again as needed. During this time, the loan does not accrue interest, and mortgage insurance on the portion of the LOC that remains untouched. A LOC also provides:
- Security: The funds in the LOC are secured. They are not capped, restricted, frozen, or eliminated if property values decline.
- Growth: The available funds in a LOC will grow. The untouched portion of the LOC grows at a compounding rate.
- Flexibility: A LOC offers more flexibility and growth than the homeowner would have received with a monthly fixed payment or a fixed-rate lump sum disbursement at closing.
A Reverse Mortgage May Be A Good Idea If:
- You and your spouse are both 62 or older
- Youre in good financial standing
- You and your spouse are physically able to maintain the home
- Youve considered the needs of your heirs
- Youve built enough equity that you have a low mortgage balance and the payout from a reverse mortgage would cover your needs
- Your home value is or has been increasing
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