Five Things You Need To Know Before Taking A Reverse Mortgage

Reverse mortgages can be a great way for seniors to access the money tied to their home. A home equity loan is a home equity loan that is 62 years old and over and has significant equity in the home. It allows these seniors to borrow money for the value of their home and receive money as a lump sum, fixed monthly payment or credit line. the entire balance of the loan becomes due and payable when the borrower dies, is permanently removed or the house is sold.

If you think that sounds like an attractive proposition, you’re not alone. Reverse mortgages are also becoming more popular, with 43,000 issues in 2020 (the latest statistics available). This was a 23% increase over the previous year.

Be aware, however, that reverse mortgages come with risks, liabilities, and costs — and that they are sometimes hidden or difficult to calculate before finalizing your reverse mortgage. In this article, we will show you five of these issues.

  • Sometimes the risks, obligations and costs of a reverse mortgage are hidden or difficult to calculate before finalizing your reverse mortgage.
  • Lenders who use high pressure sales tactics may be red flagged.
  • There are many additional charges, which are often incorporated into the loan, so they are not immediately apparent.
  • You should add your spouse as a co-borrower where needed.
  • A reverse mortgage does not mean that your expenses are over: You must continue to pay real estate tax and homeowners insurance, otherwise you may face foreclosure.
  • Other ways to access your equity may be more cost effective in the long run.

Some lenders use high pressure sales tactics

The first thing you need to know is that reverse mortgages have a reputation for attracting predators and lenders. Some seniors have been targeted by high pressure sales tactics for reverse mortgages. You should be especially skeptical if a salesperson makes suggestions on how to spend money from your reverse mortgage, and especially if he or she suggests that you invest the money in another financial product.

However, this does not mean that a reverse mortgage is always a bad idea. For many people, a reverse mortgage can be a good way to provide themselves with a normal, reliable retirement income. Just make sure you understand all the intricacies of getting a mortgage.

Reverse mortgages are high

The cost you will pay to get a reverse mortgage can be very high compared to other forms of lending on your own funds. Borrowers must pay a down payment, a down payment of mortgage premiums, continuous mortgage premiums (MIPs), loan service fees and interest. The federal government limits the amount that lenders can charge for this information, but the commission, in particular, can be high — it is limited to $ 6,000.

These fees may not be immediately apparent to seniors considering a reverse mortgage, as they are often paid off with the money you borrow. This means that you will not necessarily receive the money and then you will have to pay it to the lender, who may hide the fact that you are paying it. In practice, this process means that fees and interest are deducted from your own funds.

Make sure you understand the rules for settling reverse mortgages and your other obligations. If you are away from home for more than 12 consecutive months, even for medical reasons, you may be forced to sell your home. Likewise, your lender can exclude you if you are left behind with your homeowner’s premiums.

You will need to add Borrowers

It is also important to pay attention to the rules of residence when taking out a reverse mortgage. A reverse mortgage must be made on your “main residence”, which is where they spend most of the year. If you leave this home for six months or 12 consecutive months, even for medical reasons, your lender may terminate your reverse mortgage and require you to sell your home to pay off your debt.

This can be a particular problem for married couples living together, but only one of them has his name on the reverse mortgage documents. In this case, the spouse may be forced to sell his home to pay off this debt while still living on it. To avoid this result, you should make sure that you have added your spouse as a co-borrower or at least make sure that you can prove that he / she qualifies as an eligible non-borrowing spouse.

You have Obligations

When considering whether a reverse mortgage can support your retirement, you should consider the cost of real estate tax and homeowner insurance. Most reverse mortgage lenders require borrowers to stay informed about both. This is because your home is secured for the loan and, if damaged, may not be sold at the fair market price, which means the lender will not get his money back.

In other words, after making a reverse mortgage you will have obligations to your lender. And if you do not repay them, your lender may cancel your loan. This is a real issue with reverse mortgages. In recent years, according to a 2019 Brookings Institution document on reverse mortgages, “18% of reverse mortgages ended in foreclosure” —sometimes because property taxes had not been paid. but most of the time because the homeowners were no longer staying at home.

There are other options

Understandably, many reverse mortgage lenders will not tell you that there are other — and possibly cheaper — ways to access the equity you have created in your home.

These alternatives include:

  • A refinancing with redemption. If you want to access a large amount of home equity at the same time, a cash refinance can help you with that. If you do this, you will have to make monthly payments to a lender. However, in the long run you can keep more of your own funds compared to a reverse mortgage.
  • A mortgage or a HELOC. A Home Equity Credit Line (HELOC) provides homeowners with access to home equity. Unlike a reverse mortgage, mortgages and HELOCs require borrowers to make payments. On the other hand, they may come with less fees and may be a less expensive alternative to a reverse mortgage.

The best option for you will depend on the reasons you are looking for a reverse mortgage. Contacting a HUD counselor can be helpful if you are still unsure what to do.

What is the disadvantage of getting a reverse mortgage?

Mainly the expenses. Reverse mortgages have expenses that include lender commissions (origin fees are limited to $ 6,000 and depend on the amount of your loan), FHA insurance charges and closing costs. These costs can be added to the balance of your loan. However, this means that you will have more debt and less equity.

Are Reverse Mortgages Taking Advantage of the Elderly?

Sometimes, but not always. There have been reports that reverse mortgage lenders have targeted the elderly with aggressive sales tactics. However, for some seniors a reverse mortgage can be a great way to unlock the value of their home and provide a reliable source of income upon retirement.

How Much Money Do You Make From a Reverse Mortgage?

The income you will receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount you can borrow will be based on the age of the youngest borrower, the loan interest rate and the lower than the estimated value of your home, or the maximum FHA claim amount, which is $ 970,800 as of January 1, 2022 .

The bottom line

A reverse mortgage can be a great way for seniors to access the equity they have created in their home. However, reverse mortgages can have hidden costs and liabilities. It is important to understand these before agreeing on anything.

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