Is A Reverse Mortgage Worth It
by Kimberly Rotter | Updated Oct. 14, 2021 – First published on Oct. 10, 2021
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They’re a great fit for some homeowners, but a reverse mortgage can leave surviving family members with no equity, and sometimes no home.
A reverse mortgage turns home equity into cash — without requiring that you move out of your home. It can be a helpful financial tool for some retirees. But before you jump in, here’s what you need to know about the potential downsides.
Your Heirs Have Options
Reverse mortgages can be paid off by borrowers sooner, but typically end when the borrower moves, sells the home or passes away. In an estate situation, heirs have several choices: They can sell the property to repay the debt and keep any equity above the loan balance they can keep the home and refinance the reverse mortgage balance if the propertys value is sufficient or, if the debt exceeds the value of the property, heirs can settle the loan by giving the title back to the lender. The lender can then file a claim for any unpaid balance with the insurer .
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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What Is A Single
Also known as property-tax deferral programs and deferred payment loans, single-purpose reverse mortgages allow homeowners to access part of their homes equity to pay for a lender-approved expensetypically property taxes and necessary home repairs. They provide a one-time lump-sum advance.
As with standard HECMs, single-purpose reverse mortgages are not installment loans that you repay through monthly payments. Instead, the entire loan becomes due when you sell the home, move to another primary residence , or die.
Repayment may also be triggered if you stop paying homeowners insurance or if the home falls into disrepair and/or is condemned by the city.
You Can Still Lose Your Home To Foreclosure
When you dont meet these requirements, your home can be foreclosed. Its important to make sure you have money available to make these payments or risk losing your home. Some lenders will create a set aside account to help you deal with these costs, funneling a portion of your loan into the account. However, a set-aside account isnt a guarantee that youll always have the money for these costs. Pay attention, and be sure youre up to date.
In the end, a reverse mortgage is like any other financial tool. You need to understand how it works and how it might fit into your finances to decide whether its right for you.
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How Do You Pay Back A Reverse Mortgage
As mentioned before, you do have the option of making regular payments to your loan, but repayment isn’t required until you sell the home, no longer live there or pass away. When you do eventually sell your home, the money from the sale will go toward paying back your existing reverse mortgage plus interest.
This means you won’t make as much money on the actual sale as you might have with a traditional mortgage. A reverse mortgage simply lets you take advantage of your home’s value sooner than later, which is why these loans are intended for homeowners of retirement age.
If you have a HECM, which is backed by the government, your loan is considered a non-recourse loan, meaning youll never owe more than your home is worth. If you sell your home for less than what you owe, you will not have to pay the difference.
If you pass away, and your heirs wish to keep the home, they can refinance to a traditional mortgage, purchase it for the amount owed on the reverse mortgage or 95% of the appraised value whichever is lower. They can also sell the home and keep any remaining proceeds after the loan is paid off or simply sign the deed over to the lender.
The decision your heirs make will usually depend on how much equity is in the home. You shouldnt take out this sort of loan if leaving your home to your heirs, with or without a traditional mortgage, is a high priority for you.
Find a match.
There are three main types of reverse mortgages.
Can You Walk Away From A Reverse Mortgage
If your outstanding loan balance exceeds the current property value and you can no longer stay in your home, you have a couple of choices. You can either do a deed in lieu of foreclosure or simply walk away. Reverse mortgage loans are non-recourse and its debt cannot be transferred to your estate or heirs.
Do You Need Good Credit To Get A Reverse Mortgage
If you are a Canadian aged 55 or older and own your own home, then one of the ways that you can access equity from your home is through a reverse mortgage. A reverse mortgage is when you borrow against the equity in your home and receive cash either in monthly payments , in a large lump sum, or a combination of the two.
One of the things that makes reverse mortgages such an attractive choice is that you do not need to have good credit in order to be approved. Thats because the lender essentially has the guarantee that once you are no longer living in your home , the lender will get paid back through the proceeds of the sale of your home.
Why Should You Consider a Reverse Mortgage?
There are many reasons why people choose to get reverse mortgages. Some have unexpected expenses such as medical emergencies or home repairs that need to be done. Others reach retirement only to find out that they havent saved enough money to fund their lifestyle. And others simply want a way to be able to enjoy all the home equity that they have built up over the years.
Reverse mortgages can be a good way to fund these things because unlike a credit card or personal line of credit you do not need to repay reverse mortgages for as long as you are living in your home. And unlike other types of loans, you dont need to have good credit to be approved.
Whats The Catch?
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There Are Several Costs
You could be subject to several costs when you decide to get a reverse mortgage. Some of the fees that come with a reverse mortgage include:
- Mortgage insurance: An initial premium of 2% of the loan amount, plus 0.5% of the annual outstanding loan balance each year.
- Closing costs: You might be stuck with these third-party charges, depending on the lender you use, and they vary.
- Origination fees: Lenders can charge up to $6,000 in origination fees, based on your homes value.
- Servicing fees: The FHA allows lenders to charge monthly servicing fees.
All of these fees can be included in your loan, but they will reduce the amount you receive.
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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.
When A Reverse Mortgage Might Be For You
- You want to age in place and your home can accommodate it.
- Your home needs accessibility improvements for aging in place.
- You dont care about leaving your home to your heirs.
- You want or need cash, and you cant qualify for a mortgage refinance, home equity loan, or home equity line of credit, perhaps because you have bad credit.
- You can afford to keep up indefinitely with homeowners insurance, taxes, and maintenance.
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Reverse Mortgages May Impact Medicaid Benefits
Lending institutions are quick to say that obtaining a reverse mortgage will not affect one’s Medicaid payments, but for this to be true, the loan must be structured very carefully. A lump-sum payment, for example, will count as an asset that you would need to spend down before you would be eligible for Medicaid payments.
However, according to LongTermCare.gov, from the U.S. Department of Health and Human Services, “As long as you spend the payments you receive in the month that you receive them, the money is not taxable and does not count towards income or affect Social Security or Medicare benefits.” Such payments also do “not count as income for Medicaid eligibility.”
LongTermCare.gov also notes that if the total liquid resources are more than $2,000 for an individual or $3,000 for a couple, this could make someone ineligible for Medicaid. However, if you receive monthly payments that you spend on your ongoing expenses and don’t accumulate savings, you may be all right.
Individuals currently receivingor who anticipate receivingMedicaid should consult an accountant and a financial advisor in order to make certain that they are aware of all of the potential ramifications of taking out a reverse mortgage.
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You Cant Be Forced Into Early Repayment
Repayment of the reverse mortgage will be triggered when one of the following circumstances applies: 1) the home is no longer your primary residence 2) you sell the home or 3) you die.
When you sell the home, youre expected to use the proceeds to pay off your remaining loan balance. However, if the home sells for more than you owe, you can keep the difference and use it for something else.
While you wont have to make monthly loan payments, you will likely have to make monthly payments to cover property taxes and insurance and take care of ongoing maintenance costs.
If you die, your heirs might have to repay the loan. For those whose estates cant afford the loan, heirs might be required to sell the home to get the proceeds necessary. Luckily, though, they wont be expected to pay more than the homes current market value, so they arent liable if the home has lost value.
Reverse Mortgage Closing Costs
The federal government does not administer jumbo or proprietary reverse mortgages, so it does not limit the closing costs associated with these reverse mortgages. You’ll need to carefully compare offers from several lenders and make sure you understand them before committing to a lender.
About 31 percent of Americans in 2013 had zero retirement savings.
On the other hand, the federal government does administer HECMs, so it regulates the closing costs of these loans. The government gives you the option to pay the charges out of pocket or finance them by adding them to your loan balance. Some HECM charges, paid to the government, are not negotiable. But you can negotiate some lender fees with the lender.
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Reverse Mortgages: An Ideal Financial Solution For Many Canadians
As weve seen above, many of the perceived CHIP Reverse Mortgage problems are simply not true. However, one key truth about reverse mortgages is that they provide security for many Canadians during their retirement, as well as reduced financial stress and a better quality of life.
To find out how much you could qualify for, try our reverse mortgage calculator, or call us at 1-866-522-2447.
The guarantee excludes administrative expenses and interest that has accumulated after the due date.
Who Should Get A Reverse Mortgage
A reverse mortgage can help you turn your biggest financial asset into a monthly income. If these criteria apply to you, a reverse mortgage might be a viable option:
- You have a lot of equity in your home or it is paid off
- You want or need more money every month
- You don’t expect to have a financial hardship if you max out your proceeds before you die
- You want to preserve your retirement account balances
Reverse mortgages have their value, in the right circumstances. Just be sure to research how a reverse mortgage will affect your finances — and your family — before you sign on the dotted line.
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Good Times To Get A Reverse Mortgage
When You Need the Money If you need money now and you want to stay in your own home, then now a reverse mortgage can be a good solution.
A reverse mortgage helps borrowers in need in two key ways:
- The loan eliminates your existing mortgage . This means that you will no longer have to make regular mortgage payments. This alone can dramatically improve your monthly budget.
- In most cases, the loans can also give you access to cash or a line of credit. This money can be used in any way you want. You can use the money to make ends meet, enhance your monthly spending or splurge on something you have always wanted. Many people use the funds to help with medical costs, remodeling, cover larger one-time expenses such as property taxes, or to help a loved one.
When Housing Prices Are High When your home is valued higher, your reverse mortgage loan amount is higher. If your home value falls, then the amount you qualify for also falls and, in some cases, you might not qualify at all.
Housing values are generally up across the United States, but they do vary greatly and are dependent on your exact location.
When Interest Rates Are Low When interest rates are low, you can get access to more money from a reverse mortgage. Interest rates are at record lows right now.
When You Are Older The older you are, the more you can qualify for with a reverse mortgage.
A reverse mortgage with a line of credit can be one of the MOST affordable ways to secure a reverse mortgage because:
You Live With Someone
If you have friends, relatives, or roommates living with you who are not on the loan paperwork, they could conceivably land on the street after your death. Those boarders may also be forced to vacate the home if you move out for more than a year because reverse mortgages require borrowers to live in the home, which is considered their primary residence.
If a borrower dies, sells their home, or moves out, the loan immediately becomes due. One solution is to list your boarders on the loan paperwork however, no one living with you under the age of 62 may be a borrower on the reverse mortgage.
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How Much Can You Borrow With A Reverse Mortgage
The proceeds that youll receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount that you can borrow will be based on the youngest borrowers age, the loans interest rate, and the lesser of your homes appraised value or the FHAs maximum claim amount, which is $822,375 as of Jan. 1, 2021.
However, you cant borrow 100% of what your home is worth, or anywhere close to it. Part of your home equity must be used to pay the loans expenses, including mortgage premiums and interest. Here are a few other things that you need to know about how much you can borrow:
- The loan proceeds are based on the age of the youngest borrower or, if the borrower is married, the younger spouse, even if the younger spouse is not a borrower. The older the youngest borrower is, the higher the loan proceeds.
- The lower the mortgage rate, the more you can borrow.
- The higher your propertys appraised value, the more you can borrow.
- A strong reverse mortgage financial assessment increases the proceeds that youll receive because the lender wont withhold part of them to pay property taxes and homeowners insurance on your behalf.
How much you can actually borrow is based on whats called the initial principal limit. In January 2021, the maximum initial principal limit was $822,375. The average borrowers initial principal limit is about 58% of the maximum claim amount.