Risks Associated With Reverse Mortgages
While taking an HECM is a viable way to obtain supplement income based on your home equity, it comes with disadvantages. Because it uses your home as collateral, if youre not careful, it puts your home at risk. Here are several reasons why taking a reverse mortgage might not work for you.
For a summary of the pros and cons of HECM reverse mortgages, refer to the table below:
| Pros | |
|---|---|
| Puts your home at risk of foreclosure | |
| Having extra income gives you financial wiggle room in case of emergencies | Most reverse mortgage come with adjustable rates, which means your loan balance can increase over the yearsYour loan balance may end up higher than the propertys value |
| Allows you to purchase a new home that is more suited for senior living | Reverse mortgage payouts are not tax deductible unlike traditional mortgage payments |
| Spouses listed in the loan agreement may remain in the home after the borrower dies | Unlisted surviving spouses may face possible eviction after the borrower dies If your spouse or heirs want to keep thehome, they must pay the reverse mortgage |
Key Benefits Of A Jumbo Reverse Mortgage
The key benefit of a jumbo reverse mortgage is the ability to maximize loan proceeds for home values at higher levels. The exact percentages and figures will vary depending on several factors including the interest rates, borrowers ages, and the home value. However, many jumbos are available with a lending limit of $4 million or more a significant increase over the HECM lending limit of $970,800
Reverse Mortgages: What Are Hecms And How To Use Them
Before reaching your senior years, youve probably set aside savings and planned for retirement. But depending on your situation, you might need additional income to support you as you age. While youve saved enough for daily expenses, you also have to factor in extra medical bills and other important costs. For some people, they might want extra money to purchase a better home more equipped for senior living. Others may even want an extended vacation to enjoy their golden years.
If youre close to retirement, its a good time to look into reverse mortgages. Our guide will discuss what reverse mortgages are and what they are used for. Well focus on Home Equity Conversion Mortgages , including qualifications for this type of loan and how they work. Well also explain the benefits and disadvantages reverse mortgages. By knowing your loan options, we hope to help you make better financial decisions before and during retirement.
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What Is A Reverse Mortgage And Are They Available To Expats
Do you want to earn money from your home? Releasing the equity from your residential or investment property might seem too good to be true. However, if you need some extra cash towards the end of your life, a reverse mortgage might answer your problems.
Read on to discover how you can apply for a reverse mortgage, the amount of money you can borrow, and whether Aussie expats are eligible.
Who Offers Reverse Mortgages In Canada
There are currently just two mainstream Canadian reverse mortgage providers.
The best known is HomeEquity Bank, which offers its CHIP reverse mortgage. HomeEquity Bank was the countrys first reverse mortgage lender.
Equitable Bank is a newer competitor, having launched in 2018. It offers the PATH reverse mortgage.
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What Fees Can My Lender Charge Me
With respect to reverse mortgages under New Yorks Real Property Law sections 280, or 280-a, lenders may only charge those fees authorized by the Department in Part 79.8. All costs and fees must be fully disclosed and reasonably related to the services provided to or performed on behalf of the consumer. Specifically, a lender may charge the following fees, among others, in association with a reverse mortgage loan:
- An application fee
Second Appraisals On Select Reverse Mortgages
As a requirement, all reverse mortgage borrowers must have an official home appraisal. This is crucial to confirm the propertys current market value, which is a factor that determines the loan amount youll qualify for. The higher the appraised value, the more money you can receive on your reverse mortgage. For this reason, some homeowners may have appraisers overstate the value of their home to obtain larger loans.
In 2018, after widespread appraisal concerns, the FHA began requiring second appraisals on selected loans where they thought the valuations were inflated. This was implemented to reduce risks to the Mutual Mortgage Insurance Fund. FHA Commissioner Brian Montgomery referred to these appraisal issues on the loan process:
We have spent considerable amount of time over the last 30 days, including we locked ourselves in here for almost five hours, and we were triaging the HECM portfolio, looking for deficiencies. Looking for areas of concern, Montgomery said on call with reporters. There was one area where we are going to hone in on and thats appraisals.It did dawn on us that we have a higher appraisal on the front end, he continued. Given the nature of the reverse product, where the properties tend to deteriorate more, obviously were talking about senior citizens, and then now the product is worth less after the life event. Were almost maybe feeling that pain twice.
| Overview |
|---|
| Increases over time as interest accrues |
Proprietary Reverse Mortgages
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Potential To Affect Age Pension
While taking out a reverse mortgage does not make you ineligible for the age pension, it can nonetheless have an impact on your eligibility for payments from Centrelink. For information on how this could affect you based on your particular needs and circumstances, you can contact Services Australias Financial Information Service.
Fees And Legal Requirements
Fees
Fees do apply to your Heartland Reverse Mortgage,including when you set up your loan or set up further top-up loans.For full information about our fees and when they are charged,see our fee schedule.
Independent legal and financial advice
To protect your own interests, you will be required to seek advice from your own legal adviser, who will provide you with the necessary independent legal advice you need before making any decisions. They will advise you about their fees, and you will be responsible for any costs that arise through your engagement with them in regards to your reverse mortgage application.
Legal obligations
In order for us to keep our promises to you, you also have a number of legal obligationsto us. This includes continuing to look after your home, making necessary repairs,and adequately protecting it from damage. You also must continue to pay your rates,and insure your property.
To help you monitor your loan, we send you a statement every six months,with details of your loan over the previous period, including interest.
Code of Banking Practice
The Code of Banking Practice sets out standards for good banking practice. We adhere to the Code and see it as a minimum standard to maintain good relationships and communications with our customers.
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Comparing Downsizing To A Reverse Mortgage
Downsizing can be the most economically efficient way of securing money from your home in retirement. However, the costs of moving are impossible to generalize and declining home values or a soft real estate market may make your home difficult to sell.
Nonetheless, it might be worth your while to consider how much you might be able to sell your house for and how much less you could buy another house for. If considering downsizing, you will also want to factor in the costs of using a realtor to sell your existing house and buy a new house and moving costs as well as the emotional attachment you have to your existing home.
Tax Benefit On Reverse Mortgage Loan
Tax-free earnings are one of the typical reverse mortgage benefits that retirees can enjoy. As per the Section 10 of the Income Tax Act 1961, the pay-outs received by a senior citizen, either as a lump sum or through periodic payments is not treated as an income. Hence, payments from the financing facility are non-taxable.
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What Is The Pension Loans Scheme
The Pension Loans Scheme is an Australian Government initiative that helps pensioners and self-funded retirees receive an income boost. It is a voluntary reverse equity mortgage scheme that allows Australians to receive a non-taxable supplement secured by the value of their homes. It works in the same way as a typical reverse mortgage, with compound interest, and the loan can be repaid in increments at any time or in full when the property is sold. Further information is available on the Services Australia website.
Before taking out a reverse mortgage, it is important to understand the impact it will have on your financial future and your retirement. It is also important to keep in mind that if you pass away with money owing on a reverse mortgage, the balance of the money owing will need to be paid off to settle the loan. According to Moneysmart, reverse mortgages taken out in recent years in Australia have negative equity protection, so the amount that ends up being owed to a lender cannot exceed more than a home is worth .
How Much A Reverse Mortgage Can Cost
Costs associated with a reverse mortgage may include:
- a higher interest rate than for a traditional mortgage
- a home appraisal fee
- a prepayment penalty if you pay off your reverse mortgage before it is due
- legal fees for closing costs or independent legal advice
The costs will vary depending on your lender. Some fees may be added to the balance of your loan. You may have to pay for others up front.
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Better Mortgage Company: Best Online Lender
Better.com is an online mortgage lender offering a range of loan products in the majority of states in the U.S, and one of Bankrates best mortgage lenders overall.
Strengths: Better.com can save you time and money with three-minute preapprovals and 21-day closings, on average, and no lender fees. If you get a more competitive mortgage rate from another lender, you can also take advantage of the Better Price Guarantee, in which Better.com either matches that rate or gives you $100. The lender offers seven-days-a-week support by phone, as well, if you need it.
Weaknesses: If youre looking for a VA loan or USDA loan, youll have to search elsewhere Better.com currently doesnt offer these loan types. Although the Better Price Guarantee can help you get a lower rate, its only available if you apply online directly through the lender.
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Be Wary Of Sales Pitches For A Reverse Mortgage
Is a reverse mortgage right for you? Only you can decide what works for your situation. A counselor from an independent government-approved housing counseling agency can help. But a salesperson isnt likely to be the best guide for what works for you. This is especially true if he or she acts like a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you can spend the money from a reverse mortgage.
For example, some sellers may try to sell you things like home improvement services but then suggest a reverse mortgage as an easy way to pay for them. If you decide you need home improvements, and you think a reverse mortgage is the way to pay for them, shop around before deciding on a particular seller. Your home improvement costs include not only the price of the work being done but also the costs and fees youll pay to get the reverse mortgage.
Some reverse mortgage salespeople might suggest ways to invest the money from your reverse mortgage even pressuring you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage. You dont have to buy any financial products, services or investment to get a reverse mortgage. In fact, in some situations, its illegal to require you to buy other products to get a reverse mortgage.
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Will Mortgage Rates Go Down In December
Mortgage rates keep trending sideways, only making small moves week-to-week driven by the opposing pulls of worsening coronavirus numbers and an improving economy. However, the latest news from the Federal Reserve points to rate hikes on the horizon for 2022.
Mortgage rates inched up as a result of economic improvement and a shift in monetary policy guidance, said Freddie Mac Chief Economist Sam Khater.
We expect rates to continue to increase into 2022 which may leave some potential homebuyers with less room in their budgets on the sideline.
Most housing experts are expecting an overall upward trend through the end of 2021 and into 2022. And thats because the forces pushing mortgage rates higher arent going away:
- InflationHigher inflation typically leads to higher rates. And the annual U.S. inflation rate was at a 30-year high in October
- Economic recovery Retail sales increased by a wider margin than expected in October. And unemployment claims fell to their lowest level since March 2020. Both are strong indicators of an improving economy, which should lead to increased rates
- Fed policy changes As the Federal Reserve continues to pull back on its Covid-era stimulus, mortgage rates should continue to rise
But there are other forces working to pull rates down, which is why weve seen spikes and drops over the past few weeks.
As has been the case since 2020, Covid trends are one of the biggest indicators for mortgage rates right now.
What About Your Home Equity
Another huge misconception is that a reverse mortgage will eat away your home equity. This is only true if your home does not grow in value at all.
Almost every home in Canada is growing in value just now and close to 100% have been growing in value in the past 5 years.
How much does it need to grow to offset the reverse mortgage cost? A neat trick is that the approximate amount your home needs to grow is at half of the interest rate.
This is because a reverse mortgage is taken out on up to 55% of your home. Your home equity growth still compounds on 100% of your home. So, because the mortgage balance is roughly half the size, your home equity growth only needs to be around half of the interest rate.
Heres the quick math:
- You take out a reverse mortgage on half your home at 5%
- Your home simply needs to grow > 2.5% per year to offset the interest and your home equity will continue to go up.
The good news? From 2020-2022 there are very few areas of Canada that have seen home prices grow less than 2.5% in fact most of them have been considerably higher than this.
On top of that, if you take out less than 55% of your home value , then your home equity growth can be less than half of the rate and you will still see your home equity growing over time.
| Home equity growth at 6% | $87,456 |
As you can see for this example if you have a $250,000 property and $100,000 reverse mortgage your home would only need to grow a little more than 2% to offset all of the interest .
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How Can I Get The Best Interest Rate On A Reverse Mortgage
To get the best reverse mortgage interest rate, shop around. Getting a few quotes will give you a sense of what a reasonable rate looks like based on your circumstances, and if you get an outlier either very high or low you can ask the lender more detailed questions about the rate.
Some interest rate factors are beyond your control, such as your age, location, the appraised value of the home, and current market rates.
So its important to control the factors you can influence, including shopping around and making an informed decision about how to structure your loan proceeds.
What Is The Difference Between Jumbo And Proprietary Loans
Where jumbo reverse mortgages are proprietary by nature, proprietary reverse mortgages are not necessarily jumbo. Jumbo is a reference to a large loan amount. Some proprietary reverse mortgages are offered to home values as low as $400,000 where Jumbo programs usually benefit those high valued homes that are in excess of the HUD lending limit $970,800.
Additional Resources:
Read my article published at Forbes.com The Evolution Of Jumbo Reverse Mortgages.
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I Currently Have A Mortgage On My Home Can I Still Get A Reverse Mortgage
Yes, although any reverse mortgage lender will require that the proceeds from a reverse mortgage will first go to pay off the balance of your existing mortgage. As such, an existing mortgage will limit the amount of the net loan proceeds you will receive under a reverse mortgage. When considering whether a reverse mortgage is right for you, it is important to discuss with a housing counselor whether the net loan proceeds will be enough to enable you to live in your house. A list of New York non-profit housing counseling agencies is available.
