Maybe you want to supplement your retirement income. Or maybe you want to have some extra cash to turn your retirement into an adventure. Whatever your financial goals are for retired life, getting a reverse mortgage may be the first step to making your life a little easier. If you’ve been considering a reverse mortgage, be sure to learn all the reverse mortgage facts that you can before starting your journey.
Reverse mortgage explained
First things first—explaining what a reverse mortgage is. If the only thing you know about reverse mortgages is what you’ve learned from commercials, keep on reading.
A reverse mortgage is a mortgage option for homeowners 62 or older that lets them access their home’s equity while continuing to live in their home. With a reverse mortgage, the lender pays you each month, instead of you paying them. But don’t forget to keep paying your homeowners insurance and property taxes! In addition to being at least 62 years old, reverse mortgage eligibility requirements include:
- The property must be your primary residence.
- The property must be a single-family home, a 2–4 unit home with one unit occupied by the borrower, a HUD-approved condo or a manufactured home that meets HUD requirements*
- Property must be free and clear of outstanding mortgages or liens, or the proceeds from the reverse mortgage must be used to pay off any existing mortgage or liens
- Home must be in “good condition” or lender will tell you what repairs need to be made.
- You must receive counseling from a HUD-approved reverse mortgage counseling agency to discuss your eligibility, financial implications of the loan and other alternatives.
Reverse mortgage pros and cons
It’s always good to create a pro/con list when making big financial decisions. Getting a reverse mortgage has many benefits, but it’s natural to be concerned about the downside to a reverse mortgage. Let’s break down the pros and cons of reverse mortgages.
Pros:
- Supplement your retirement income—The money from your reverse mortgage payout is yours to do with as you choose. Some common uses include everyday expenses or a vacation.
- No monthly mortgage payments—If you still have a principal balance left on your mortgage, your reverse mortgage funds can be used to pay off the balance in one large payment. If you own your home outright, you will have the full loan amount to spend as you choose.
- No credit or income requirements—Unlike a traditional mortgage, qualifying for a reverse mortgage does not depend on your credit score or your income.
- Keep ownership of your home—You remain the owner of your home when you get a reverse mortgage. This gives you the opportunity to pass it on to your heirs.
Cons:
- Upfront costs—There are upfront costs associated with a reverse mortgage that you will have to plan for. These include origination fees, closing costs, mortgage insurance premiums and interest charges.
- Depends on home value—Home equity is a big factor of your reverse mortgage financing. If you still have a balance on a mortgage and plan to use your reverse mortgage funds to pay it off, you will have less paid to you over time.
- No moving in the near future—Since one of the qualifying factors of a reverse mortgage is maintaining the home as your primary residence, you cannot move to a new primary residence without paying off the reverse mortgage balance.
How do you pay back a reverse mortgage?
There may come a time when you, or an heir, have to pay back the loan. The time to repay a reverse mortgage comes whenever the last surviving borrower or eligible non-borrowing spouse sells the home or no longer resides in the home as a primary residence.
One way to repay the reverse mortgage is to sell the home. The borrower, or an heir, can sell the home and use the proceeds to repay the lender, then keep the funds that remain. You could also choose to refinance the reverse mortgage if you need to move but want to keep ownership of the home. However, doing so will likely mean getting a new traditional mortgage and making a monthly mortgage payment again. Another option is for heirs to take out a traditional mortgage if they want to keep the home. They can use this loan to pay off the reverse mortgage balance.
While a reverse mortgage is a viable option for many homeowners 62 and older, it’s important to understand all the facts. Discussing your situation with a trusted lender can help you make a more informed decision. Contact your local PrimeLending loan officer today to get started.
*Reverse Mortgages are neither “endorsed” nor “approved” by the Federal Government. The FHA (Federal Housing Administration) provides certain insurance benefits for lenders and borrowers in connection with the lender’s HECM loans; the FHA does not make or originate loans. It is strongly advised that you consult with your family and / or trusted financial planner when considering any reverse mortgage loan.
These are brokered loan products. Not available in the following states: NY, NC, or HI. All credit decisions for brokered loan products will be made by the third-party lender. Restrictions and limitations apply. You must still live in the home as your primary residence, continue to pay required property taxes, homeowners’ insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure. As required by FHA, you will be charged an up-front mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance. Your current mortgage, if any, must be paid off using proceeds from your HECM loan. If your home needs repairs to be eligible for a HECM loan, you may be able to use the proceeds of the loan to accomplish this. Generally, the money received is not considered income and could be tax free, please consult your tax advisor and appropriate government agencies for any effect on taxes or government benefits.
