We’ve lived in our home a long time. The equity has built up, since the mortgage is paid off. Many people in this situation would be thinking that they should have fun with all that equity money. While others may think their home equity is a good way to boost their monthly income in order to make ends meet.
In both cases, they may be thinking that reverse mortgages are the way to make it happen! Reverse mortgages may be a way to supplement your income, pay off debt, take a dream pilgrimage, or remodel your home. But take your time and settle back into that easy chair first. A reverse mortgage can be complicated, so it is important to consider the positive and negative aspects of a reverse mortgage before getting one.
So what is a reverse mortgage, anyway? When you get a forward mortgage, you borrow money to buy your home. You pay the lender principal and interest each month on the amount borrowed. A reverse mortgage is simply a loan in the opposite direction. With a reverse mortgage, the lender pays you. Reverse mortgages take part of the equity in your home and convert it into payments to you. The payments can occur one time, monthly, as a line of credit or some combination. This is a way to cash-in that built-up equity in your home.
On a forward mortgage, you make payments each month and your loan balance decreases while your home equity increases. A reverse mortgage is the opposite, On a reverse mortgage, your loan balance grows and your equity shrinks. However, with both types of mortgages, your home is the collateral for the loan.
The reverse mortgage is eventually repaid upon your death or when the home is sold. This includes the amount borrowed, plus interest.
You must meet the following general requirements to qualify for a reverse mortgage:
- Be age 62 or older
- Have at least 50% equity in your home, or own it outright
- Live in the home as your primary residence
- Have no delinquencies on federal debt, such as student loans or taxes
- Demonstrate your creditworthiness as a borrower
- Provide proof of assets or income to pay your homeowners insurance, property taxes and other ongoing expenses
- Participate in a session with a reverse mortgage counselor
Generally, you don’t have to pay back the money for as long as you live in your home. When you sell your home, move out, or die, you, your spouse, or your estate would repay the loan, plus interest.
Be aware there’s always a chance your home value could decrease and the amount owed on the reverse mortgage can become more than the home sells for. In this case, the amount owed would be the responsibility of your heirs, depending on the type of reverse mortgage you have.
Things to investigate before signing the dotted line on a reverse mortgage:
- The initial interest rate at which you borrow could float. Since mortgage rates are extremely low currently, probably the only way for interest rates to float are up.
- The interest is added to the loan balance. Both the loan balance plus the interest have to be paid eventually.
- Review the fees and the possibility of paying a mortgage insurance premium.
- Think about your financial plan and the part your home equity plays into it. If you wanted to give your home to a beneficiary or to use it for your long-term health care, the home value may be lower than you expected and you may not have enough money to meet your goals.
- There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs.)
A with any financial decision, there are always pros and cons which must be weighed carefully in order to make an informed decision.
On the positive side, a reverse mortgage may allow you to stay in your home and maintain your current standard of living. You can enjoy the extra income a reverse mortgage pays as long you live in your home, and that income is tax-free. The reverse mortgage allows you the flexibility of receiving a cash in a line of credit, a lump sum or monthly payments.
On the negative side, over time, you will lose the equity in your home. If your home value drops, you will also be increasing your debt load over time. That debt will be the responsibility of your estate or your heirs. Your heirs could lose your home after your death—unless they repay the loan, plus interest. There can be considerable upfront costs, such as a maximum $6,000 origination fee. The interest paid on a reverse mortgage is not tax-deductible. And the Income received from a reverse mortgage can reduce your government benefits
The bottom line: If you don’t understand the cost or features of a reverse mortgage, walk away. If you feel pressure or urgency to complete the deal, walk away.
A reverse mortgage is a tool, but it must be considered as part of your overall financial plan. Never make a huge decision like this without careful consideration of all the implications. Always seek the counsel of a trusted advisor who knows your total financial picture and goals.
The best counselor is always God. Let Him help you. Pray always without ceasing.
By: Randy Walker and Evelyn Bean