The risks and benefits of reverse mortgages
People often think of reverse mortgages as a way to get cash in retirement, but these loans also come with significant risks.
The Federal Housing Administration (FHA) offers three types of reverse mortgage loans: the Home Equity Conversion Mortgage (HECM), the Specially Adapted Housing Assistance Program-Reverse Mortgages (SAHM-RM), and the Special Needs Reverse Mortgage Program (SNRMP). A reverse mortgage is basically an agreement between you and your lender where they will pay off your home’s current balance when you die or sell it. The loan must be repaid when you move out permanently or die. Here are some things people should know about this type of loan before taking one out for themselves.
It’s important to understand that the loan you take (HECM) will be based on your age and how long you can keep living in your home.
The older you are, the more money the FHA will payout to your lender. During your first year of taking out a reverse mortgage, 60 percent of the loan amount will go toward interest (this is called points). The other 40 percent goes toward paying down what you owe. This process only takes place once; every year after this first distribution, there is no payment made toward interest or to pay down your balance.
You can also choose how much money you want to receive from the loan in a lump sum, which would be considered a line of credit. The more you take out all at once, however, your interest rate will be higher than if you take smaller amounts each year.
Because you don’t need to make payments on your loan, this can lead to major tax deductions that most mortgage holders aren’t able to claim. There are also no closing costs with reverse mortgages like there are with traditional mortgages.
Reverse mortgage loans are generally good for people who want to keep living in their homes but need some extra cash or people close to the end of life who want to be sure they have enough money for medical expenses and other needs before moving out. But it’s important for people not familiar with what types of costs they will be responsible for after receiving a reverse mortgage, which includes: property taxes, homeowner association dues, insurance premiums, maintenance fees, and utilities.
Because the loan is not attached to any specific property, borrowers can move homes without needing to pay off their loan or change anything about the original agreement.
The FHA insures reverse mortgages through HUD-approved lenders (and your home serves as security), which means you don’t have to repay the loan until all of the sellers are dead or sell the house; this makes them more secure than traditional loans. It’s also possible for older individuals who currently receive federal benefits like Social Security, Supplemental Security Income (SSI), veterans’ benefits (VA benefits), civil service annuities, Railroad Retirement Board annuities at age 62 with 10 years of service instead of 62 with five years of service. This allows you to stay in your home and receive the necessary benefits without paying a tax penalty.
The lender is allowed to pay itself back when the property is sold, which means that if you sell your home within 10 years of taking out a reverse mortgage, lenders can take their money back or re-sell your home (which means you’re responsible for the difference between what they get from selling it and what you still owe).
There are lots of fees associated with reverse mortgages; some good ones like not having to make monthly payments but also bad ones like loan origination fees and closing costs. The FHA sets caps on these fees (you’ll only spend around 2 percent of the total cost at closing), but any excess could be passed on to you.
While you don’t make regular payments, reverse mortgages do require insurance and taxes (this includes property and hazard insurance and association dues). You’ll also have to maintain your home; if it falls into disrepair, lenders can demand the loan be repaid immediately or take back some of their money from what was distributed to you at closing.
You’re not required to pay for homeowner’s insurance while taking out a reverse mortgage, but if you choose not to get any type of policy or under-insure your home, that may lead the FHA to force repayment of the loan before it’s due.
The costs associated with getting a reverse mortgage aren’t low: There will be an origination fee based on the total amount of money that you take out, and closing costs equal to three percent of the loan.
Reverse mortgages are good for some homeowners who need extra cash every month or are close to paying back their loans but can be bad if you haven’t fully thought through all of your options before making a decision about what to do with your home.
Is it right for you?
If you’re thinking about getting a reverse mortgage, there are a few things to keep in mind:
-The loan amount is based on the age of the youngest borrower, the current interest rate, and the home’s value.
-You don’t have to make monthly payments, but you will have to continue paying your property taxes, homeowners insurance, and any other applicable bills.
-The loan doesn’t have to be repaid until the last borrower dies or moves out of the home.
-Lenders can take their money back if you sell your home within 10 years of taking out a reverse mortgage.
-There are origination and closing costs associated with getting a reverse mortgage.
Reverse mortgages can be a good option for getting extra cash if you need it, but make sure you do your research and explore all of the options before going ahead with anything.
You need to weigh whether or not you’d rather use the money from a reverse mortgage now, or risk paying it back later when you’re older and might need that money to support yourself.
It’s important to take into consideration your current housing situation as well as how many years you plan on staying in one place. Housing prices fluctuate, which means that even if your home is worth more now than what was originally owed on the loan, its value could go down over time; this could mean that if you want to stay put for the rest of your life (and you’re over 62 years old), it might be better to take out a reverse mortgage now.
On the other hand, if you plan on moving in the next few years, borrowing from a reverse mortgage to pay off debts or adding some extra cash to your savings account could be the way to go.
In deciding what’s best for you and how much money you should take from a reverse mortgage, consider talking to a financial planner or counselor who can help provide advice based on your circumstances.
Reverse mortgages can be a good or bad option, depending on your personal circumstances. If you’re thinking of getting one, make sure to weigh all the pros and cons before making a decision. Remember that there are costs associated with taking out a reverse mortgage, so think carefully about whether or not you need the extra cash and how you’ll be able to repay the loan.