A Reverse Mortgage Explained
Youve probably heard a reverse mortgage explained a dozen different ways, but essentially the lender pays you to stay in your house instead of the more traditional mortgage where you pay the lender each month to live in your home.
You can receive the money in different ways, too, either in a lump sum, equal payments over a fixed period of months or years , as a line of credit to be tapped whenever you want, or as a combination of these options.
You have to be 62 or older to qualify.
Its a loan that seems almost too good to be true. Thats why its usually pitched on that fantasy-making machine, otherwise known as TV.
The salespeople pitching reverse mortgages are usually aging TV stars like Henry Winkler, aka, the Fonze from Happy Days, Fred Thompson, and Robert Wagner.
Reverse mortgage lenders, by tapping into your reservoir of nostalgia and goodwill, are also hoping to get you to tap into some of that good old home equity youve built up over the years.
They know seniors, now past their prime earning years, are especially vulnerable to suggestions promising quick fixes to their financial problems.
I’m here to tell you why you shouldn’t take out a reverse mortgage — here are 10 reasons why.
I Come At This From A Different Perspective Than Dave
I come at this from a different perspective than Dave Ramsey does. He is coming from a point of view of helping people get out of debt and become financially free. I am coming at this from the perspective of someone who works in the industry and helps people understand how to use their home equity to age in place or have more cash flow during retirement. I believe that for the right person, a reverse mortgage can be a tool to help them achieve those goals.
I think hes a bit of a blowhard and his business model is based on fear-mongering. Hes also very conservative in his financial advice, which isnt necessarily bad, but it can be limiting.
He promotes getting out of debt as quickly as possible, which is fine if you have enough money to do so, but most people dont. When youre paying off debt with high-interest rates like credit cards or student loans, it makes sense to pay them off as fast as possible. If you have low-interest-rate debt like mortgage payments or car payments, it makes more sense to pay them off over time because the interest youre paying will be less than what youd pay in interest if you paid off your debt early.
Reverse mortgages have been around for a long time, and they are a safe and regulated product.
Why Does Dave Ramsey Hate Reverse Mortgages
About a year or so back, Dave Ramsey put out a nasty video on YouTube about reverse mortgages. In his opening monologue, he couldnt see why a 92 year old lady who needed a little bit of cash to live comfortably would take a reverse mortgage.
Uncle Dave argued that she should take a 15 year mortgage. For those who arent that financially literate, he failed to point out that the monthly mortgage payment of a 15 year mortgage is higher than a 30 year mortgage, and that very few seniors on fixed income are likely to be able to afford it.
The fact that a person with a pretty prominent following would say something like that is irresponsible, dangerous, and deserves an educated response.
As usual, my main response is in a videoso if you like these sorts of things, click below to watch.
Now that youre done watching, lets pow wow for a bit. Dave Ramsey is seen as a financial guru to many people. He hates reverse mortgages, but he has other unique ideas about money as well.
IS IT A 3% RULE OR AN 8% RULE?
The most striking view of his that I disagree with the most is that retirees should withdraw 8% of their retirement portfolio each year. Remember, many financial experts dictate that one can safely take no more than 3% annually.
Why just 3%? Heres the deal, as of 2019 the stock market has been humming. Which obviously is great for all of us stock owners.
Daves argument with reverses goes as follows
Lets tackle both of these issues.
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When Is A Reverse Mortgage A Good Idea
With enough planning and financial responsibility, a reverse mortgage may just be your saving grace. Think about it: you receive a significant amount of income to help you with your monthly expenses and you no longer have to pay the mortgage . The financial freedom that a reverse mortgage provides can help you live the life that you want during your retirement. Plus, you can stay in your home until the balance becomes due, allowing you to age in place peacefully.
Getting a reverse mortgage is a good idea if you plan to stay in your home for the rest of your life. More importantly, you should be financially responsible enough to budget the loan proceeds accordingly so that you do not outlive your loan. If you tick all of these boxes, then getting a reverse mortgage may be the right choice for you.
Putting Home Ownership At Risk
The fact that no payments must be made on a reverse mortgage as long as one homeowner remains living in the house is a major feature of reverse mortgages. However, the fine print lists several circumstances when the mortgage lender can foreclose on the home. The homeowner must stay current on property tax and insurance payments. Initially, if these payments are not made, the lender would set aside some of the undrawn loan proceeds into an escrow account to pay those expenses. When the loan limit is reached, the lender could foreclose if insurance and taxes are not being paid. If the homeowner moves out for an extended period — typically 12 months — the lender can foreclose. This means that a homeowner recovering from an extended illness may have no home to return to if the lender has taken the home to sell for repayment on the mortgage balance.
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What Is A Reverse Mortgage & How Does It Work
Most of us know what a mortgage is, a loan taken out to purchase a home. But what about a reverse mortgage? Luckily, whoever named it was left-brained, definitely not a creative type. It is just as it sounds.
With a traditional mortgage, you send money to the lender and your debt, which is secured by your house, decreases. With a reverse mortgage, the lender sends you money and your debt, still secured by your house, increases.
Most reverse mortgages are offered through the Home Equity Conversion Mortgages program, which is administered by the Housing and Urban Development Department and the Federal Housing Authority .
Dave Ramseys Views On Debt
Ramsey absolutely hates debt. Hes got a strong stance that all debt is bad. He believes that if you have debt, its better to put aside savings and investing and tackle that debt full force. He wants his followers to get out of debt at all because for him, it is the only way to achieve financial peace.
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Risky Mortgage Types To Avoid
Prior to its expiration, they obtain another card that they use for the same. They continue this technique continually in an attempt to keep money borrowed at low interest rates. Many credit card issuers who catch onto a consumer using this technique will be reluctant to offer the teaser rate to such consumers. Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card.
- You can still use your credit card after the introductory rate expires.
- Because youre paying more interest on your credit card, your payments wont have the same impact on your credit card balance.
- New balances and any balance you havent paid by the time your rate expires will be charged interest based on the regular APR.
Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores. Simply put, your credit score matters for most interest rates. Lenders develop tiers based on credit scores, and those with great scores typically snag the best deals on auto loans, mortgages, credit cards and private student loans. FICO scores above 760 usually get borrowers the best rates, but every lender sets its own standards.
Dave Where Are You Getting Your Info
Daves understanding of the rules of the HUD program are sadly mistaken in several areas. Dave thinks that homes worth more than $679,650 dont qualify for a reverse mortgage which is false.
Dave mistakes the HUD lending limit with a maximum your home can be worth. You could always have a home valued higher than the limit and still get the loan, there were just no additional benefits for homes valued above the maximum limit.
Dave thinks you cant owe any federal debts which is not accurate, but you may be required to pay them at closing in some cases. And Dave thinks heirs have two options when the borrowers pass, pay the loan off at the full amount or give the house to the lender.
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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.
Why Retirees Might Consider A Reverse Mortgage
Im sorry to hear you are struggling with this decision, Laurie. I can imagine it is stressful. I will try to walk through the considerations of selling versus a reverse mortgage.
As an 82-year-old woman, you have a 50% probability of living another 10 years. So, I think you need to consider the lifestyle and financial implications of living well into your 90s.
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Is A Reverse Mortgage A Good Idea
For some people, yes. They have asked pertinent questions like:
Do I want to maximize what I can leave to my heirs?
Am I going to live in my home deep into my retirement?
How much extra income will I need to meet my needs?
Can I pay the taxes, insurance and meet all the obligations that come with a reverse mortgage?
Unlike all those people whove been foreclosed on, do I really know what Im getting into?
If the answers to those questions are sketchy, you should consider a safer financial route like a traditional home equity loan or line of credit.
Whatever the decision, seek personalized advice from a financial counselor or debt-management agency.
Tom Selleck might say reverse mortgages are not too good to be true. But Magnum P.I. showed that it always pays to investigate.
About The Author
Canada And Consumer Security
In Canada, to qualify for a reverse mortgage, all of the property owners must be over 55-years-of-age. In contrast, American lenders only required that one owner is over the age of 62.
This sort of lenient lending created potential issues for the borrowers, who were unaware of how it would affect their loans and lives. If the older spouse passes away, it then would leave the other in a situation of having to pay the mortgage balance immediately. This is one of the factors that created a negative stigma around reverse mortgages.
With Canadas safeguarding practices, it means that the loan is only triggered after the last borrower dies.
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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.
Potential Downsides To A Reverse Mortgage
Here are a few factors to consider before you get a reverse mortgage:
- Variable rate: Most reverse mortgages are not fixed-rate loans. Instead, they have variable rates, like some credit cards and home equity products. The interest rate will change along with a benchmark rate that the lender has chosen to follow. Your rate can go up or down, and that is out of your control.
- Upfront costs: You’ll pay an origination fee, an appraisal fee, and other closing costs, plus mortgage insurance premiums. You may be able to roll these costs into the loan balance, but in that case, you’ll start on day one owing a considerable amount of money.
- Other expenses: A reverse mortgage is a loan, not a sale. You’ll still be the homeowner, and that means you are responsible for all utilities, maintenance, property taxes, insurance, and other homeownership costs.
- No tax benefit: Generally, the interest on a reverse mortgage is not tax deductible.
- Loan limits: Government-backed loans are subject to current loan limits. Plus, lenders set their own limits — they won’t loan you 100% of your equity. That’s because the eventual sale price needs to cover interest and loan costs.
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How Reverse Mortgages Work
Youâre probably wondering how itâs possible to get a mortgage with no payments. Normally, when you take out a mortgage loan, the bank gives you a lump sum that you pay back with interest over time. At the end of the term, the loan is paid down to $0.
A reverse mortgage works in, well, reverse. The lender actually makes payments to you: You can choose to receive a lump sum, monthly payments, a line of credit or some combination of those options.
The interest and fees associated with the loan get rolled into the balance each month. That means the amount you owe grows over time, while your home equity decreases. You get to keep the title to your home the whole time, and the balance isnât due until you move out or die.
When that time comes, proceeds from the homeâs sale are used to pay off the debt. If thereâs any equity left over, it goes to the estate. If not, or if the loan is actually worth more than the house, the heirs arenât required to pay the difference. Heirs also can choose to pay off the reverse mortgage or refinance if they want to keep the property.
The Right Tool For The Right Job
Reverse mortgages are financial tools available to homeowners who have specific needs. When properly advised on how to access it and how to use it properly, theres no doubt that it can have a profound impact on the quality of life for senior homeowners.
Talk to your nesto advisor today to find out more about reverse mortgages.
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A Reverse Mortgage Is An Annuity
In some ways, a reverse mortgage is also an annuity. Except it isn’t a very good one. It doesn’t really care about your gender or health status. It also doesn’t guarantee to make payments until you die, even if you choose the tenure option. It only guarantees to make payments while you are living in your house. Want to move? Forget it no more payments. Need to go to assisted living? There goes your house and your annuity payments. If you’re not a big fan of loans and you’re not a big fan of annuities, you might not be a big fan of reverse mortgages, which combines the two concepts.
What Dave Ramsey Doesnt Tell You
Finally, the one thing that Dave doesnt tell you is that although there are no monthly mortgage payments due on a reverse mortgage, there is never a prepayment penalty so you can make a payment in any amount at any time without penalty.
This means that if you take out a reverse mortgage and then have a change of heart, you can simply make a lump sum payment to pay off the loan in full without having to worry about any penalties.
Of course, this is also true of traditional forward mortgages but its something that Dave Ramsey doesnt mention when hes talking about reverse mortgages.
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