When you dreamt about retirement years ago, you likely envisioned sipping refreshing beverages on a beach, gallivanting with the grandchildren, and marveling at the beauty of your paid-off home. And not surprisingly, financial worry was absent from the visualizations of your ideal scenario. While these thoughts may have seemed like faraway dreams at that time, you’ve finally arrived at the age when they could be reality. A retirement free from financial worry may now be well within reach, especially when you own a home that is ripe with equity.
Discovering the Reverse Mortgage
Cue the reverse mortgage loan: a powerful financial tool designed to help senior homeowners like you take control of their retirement finances. Also called the Home Equity Conversion Mortgage (HECM), this is a special type of home loan that allows you to access a portion of the equity you have built in your home. For many retirees, home equity may account for the largest portion of their net worth, and can play an important part in achieving a stable financial future. But exactly how can it accomplish this? The answer lies in the benefits of the loan.
The Pros of a Reverse Mortgage
Reverse mortgages have gained attention because of the different ways they have helped seniors achieve what they want in retirement.
You can afford to age at home, you have no monthly mortgage payment, and you can access equity.
Prior to reverse mortgages, retirees would have to either sell their home or assume a second mortgage if they wanted to access home equity. For those who loved their home too much to leave it, or for those who could not afford to take on monthly mortgage payments again, these options were not ideal. Today, reverse mortgages allow senior homeowners to age in their home without a monthly mortgage payment while still accessing their equity.
Keep in mind that though monthly mortgage payments are not required, it is still possible to default on the loan. Reverse mortgage borrowers must continue to pay property taxes, insurance, and keep up with the maintenance of the home in order to avoid foreclosure.
You remain the owner of the home and keep its title.
As long as you comply with all loan terms, such as keeping up with financial obligations and continuing to live in the home as your primary residence, lenders cannot take the home’s title from you. You remain the owner of the home, even while converting a portion of your equity into cash.
Home Equity Conversion Mortgages are non-recourse loans and insured by the Federal Housing Administration (FHA).
Government-insured reverse mortgages, called Home Equity Conversion Mortgage (HECM) loans, protect consumers from owing more than the value of the home when sold, and are considered non-recourse loans. This means that even if your loan balance exceeds what your home is worth, your loan is considered repaid in full from the proceeds of the home when sold. Federal insurance will pay the difference. This also means that the loan is secured by your home only, so your lender cannot liquidate any of your other assets in order to repay the loan.
Although the advantages of this loan may seem too good to be true, they are all very much within reach. However, a reverse mortgage may not be the right answer for everyone. As you consider this flexible financial tool, make sure to get educated on the loan benefits, risks, and process. The following are some possible downsides of the reverse mortgage loan.
The Cons of a Reverse Mortgage
Only your principal residence is eligible and you must occupy your home as your primary residence.
This means that investment properties or vacation homes do not qualify. This loan is meant to help senior homeowners age in place at home; therefore living elsewhere will render the loan due and payable. This is an important consideration, especially if you foresee living anywhere else for more than twelve consecutive months. Other situations in which loans have matured early include moving into a nursing home or moving in with your children.
A lien is placed on your home.
A popular benefit of this loan is the chance to eliminate paying a monthly mortgage payment because payment is deferred until the borrower permanently leaves the home. Because of this, there will be a lien placed on the home until the loan is repaid in full.
You still have obligations and responsibilities under the loan.
When you sign up for a reverse mortgage, your financial responsibilities and obligations do not end completely. You must ensure that you can afford to continue paying for basic repairs and maintenance, property taxes, and homeowner’s insurance.
Enough equity in your home is necessary.
In addition to your age and current interest rates, the amount of money a reverse mortgage could yield for you is directly related to how much equity your home has, among other factors. If your home does not have a significant amount of equity in it, there may not be enough money available for you to access in order to qualify for the loan.
Properties of higher value are more ideal for this loan.
Closing costs like appraisal, title, and notary fees are roughly the same amount no matter the value of the home. Since these expenses use a larger percentage of equity from a lower-valued home than it does for a higher-valued home, reverse mortgages may not be cost-efficient for homes with lower property values.
In addition to the pros and cons of reverse mortgages, it is important for you as a potential borrower to learn the truth regarding common misconceptions about this loan. The following are the reverse mortgage facts:
Ownership of the home remains with the borrower.
It is a common misconception that lenders take ownership of the home upon loan closing. The truth is that when all loan obligations continue to be fulfilled, senior homeowners do not lose title or ownership of the home to their lenders. Ownership of the home remains theirs.
With a reverse mortgage, heirs may still receive an inheritance.
Another misconception is that heirs lose all inheritance with a reverse mortgage, but this is untrue. When the last borrower leaves the home permanently and the loan becomes due, it is common for the borrower or heirs to sell the home to repay the loan. After the loan is repaid, heirs keep any remaining equity as inheritance. Heirs may also choose to keep the home in the family and repay the loan in another way, such as refinancing it into a traditional mortgage.
You can still get a reverse mortgage even if you have an existing mortgage.
Potential borrowers may believe they are ineligible for this loan because they already have an existing mortgage. However, borrowers with existing mortgages who hold a significant amount of equity may still be eligible. In fact, many seniors pursue a reverse mortgage specifically to pay off their old mortgage and free themselves from monthly mortgage payments.
Reverse Mortgage Lenders
When considering a reverse mortgage loan, it is important to research the lender from whom you plan to borrow. Choosing a reputable and knowledgeable lender is essential to ensuring your reverse mortgage process flows as smoothly as possible. The following are a few questions to ask when choosing a lender.
Are you Rated A+ by the Better Business Bureau?
The Better Business Bureau is an organization with a mission to “instill consumer confidence and advance a trustworthy marketplace.” Lenders who have earned an A+ rating with the Better Business Bureau are proud to demonstrate that they are ethical and trustworthy in their business dealings. Lenders rated with an A+ are known by the Better Business Bureau to have operated their business for a significant length of time, conduct business practices with transparency, maintain all proper licensing, have a clean business history (with few complaints), and have a reliable history of honoring commitments.
Are you approved and accredited by the U.S. Department of Housing and Urban Development (HUD)?
Lenders approved by HUD can offer versions of reverse mortgages called the Home Equity Conversion Mortgages (HECM), which are regulated and insured by the federal government, and offer many consumer protections.
Are you an active member of the NRMLA?
The National Reverse Mortgage Lenders Association, or NRMLA, is the “national voice of the reverse mortgage industry.” This organization serves to educate consumers about reverse mortgages, train lenders to cater to clients’ needs, and enforce a Code of Ethics and Professional Responsibility. Lenders who are active members of this organization are showing their commitment to upholding professionalism in the industry.
As with any dream, it is a smart move to research the tools that could get you there. As one of the most useful financial tools in the mortgage industry, it is worthwhile to research if a reverse mortgage can help you, and you may even want to obtain the opinion of a trusted financial advisor. Armed with the knowledge of the pros and cons, the truths about some misconceptions, and what to look for in a trustworthy and reputable lender, you have taken the first steps in determining if this loan could be the right choice to help you achieve the retirement you desire.