Chances are, you’ve seen ads online and on TV or heard them on the radio about reverse mortgages. If you’re nearing retirement age, it might sound like a pretty good idea, especially if most of your net worth is in your home.
That being said, if you are in Columbia, South Carolina, and are considering this type of loan, contact Covenant Mortgage Services to learn more. In the meantime, keep reading to learn more about reverse mortgages, how they work, and look over some of the pros and cons of reverse mortgages.
What is a Reverse Mortgage?
If you are at least 62 years old and own property, you can use the equity in the property to get a line of credit or cash from a lender. However, you do not have to worry about making monthly payments like you would on a conventional mortgage. Instead, the loan is repaid when the home is sold.
The most common reverse mortgage is the HECM, or home equity conversion mortgage, which is backed by the Federal Housing Administration, or FHA. The borrower pays an insurance premium to participate, which funds the FHA reserves. If the borrower does not pay their loan, the lender draws against the reserves.
There are a few requirements to get an HECM:
- Must be 62+
- Must own home or have the mortgage paid down considerably
- Property must be primary residence
- Cannot be delinquent on federal debts
- Subject to credit check/other requirements
- Must stay current on property taxes, HOA fees, and insurance
If you are approved, you will be required to sit through a presentation from an approved HECM counselor.
How Does it Work?
Chances are, you are wondering how you can get a mortgage without payments. Usually, when you take out a mortgage, you get a lump sum that you must pay back- with interest- over a set period of time. By the end of the term, the loan is paid down to $0.
A reverse mortgage works in reverse. The lender pays you. You can choose to get one lump sum, a line of credit, monthly payments, or a combination of the three.
The interest/fees associated with the loan are rolled into the balance each month, which means the balance you owe increases, while your equity decreases. You keep the title and the balance does not have to be paid until you move out or pass away.
When that happens, proceeds from the sale are used to pay the loan. If there’s anything left, it goes to the estate. If the loan is worth more than the house, the heirs are not required to pay the difference- unless they want to keep the property. In this case, they will either pay it off or refinance it.
Pros & Cons of Reverse Mortgage
Now that we’ve explained what a reverse mortgage is and how it works, let’s explore some of the pros and cons associated with this financial solution.
Pros of Reverse Mortgage
If you are having trouble paying your bills, a reverse mortgage may help. Here are some of the benefits of taking out a reverse mortgage:
Secures Your Retirement
This financial solution is ideal for retirees that don’t have investments or cash savings but do have equity built up in their homes. It allows you to turn an illiquid asset into cash that can be used for retirement expenses.
Allows You to Keep Your Home
You don’t have to sell your home to liquify it- you can keep it and still get cash. You won’t have to worry about having to downsize or get priced out of your neighborhood if you had to move.
You Can Pay Off Your Current Home Loan
It is not required that your home be paid off to take out a reverse mortgage. You can use the proceeds from the reverse mortgage to pay off an existing loan. This will allow you to use your money for other expenses.
No Tax Liability
Protected if Balance is More than Home’s Value
Once all is said and done, it may end up that the balance of the loan is more than the total value of your home. This happens when home prices fall. If this does happen, your heirs will not be required to pay the balance.
Cons of Reverse Mortgage
While there do seem to be lots of benefits associated with a reverse mortgage, it’s also important to note that there are disadvantages as well. Below, we’ll explore some of the potential risks of taking out a reverse mortgage.
You May Lose Your Home to Foreclosure
One of the qualifications of a reverse mortgage is the ability to afford property taxes, HOA fees, homeowner’s insurance, and other fees associated with homeownership. In addition, you must occupy the home as your primary residence for the majority of the year.
If you become delinquent on any of these or spend most of the year outside of the property, you will be considered in default and may lose your home to foreclosure.
Your Heirs May Inherit Less
Homeownership is the path to generational wealth- but a reverse mortgage typically requires the house to be sold to pay the debt. When you pass away, your heirs must pay the full balance or 95% of the appraised value, whichever is less. Typically, that requires turning the property over to the lender or selling the home to cover the debt. Also, a reverse mortgage chips away at the equity in your home. When it’s time for it to be paid off, there may not be anything left for your heirs.
It’s Not Free
While it’s true that you don’t have a mortgage payment with this financial solution, you do have other expenses. You must keep up on taxes, HOA fees, and insurance. In addition, you may be required to pay an insurance premium upfront- typically 2% of the appraised value of the home. You will be required to pay an origination fee at closing. You can roll these fees into the balance of the loan, but you’ll get less cash.
May Impact Other Retirement Benefits
While it’s true that the IRS doesn’t consider a reverse mortgage to be income, it can potentially affect your ability to qualify for other government programs, such as SSI or Medicaid. Therefore, you may wish to consult with a benefits specialist to ensure that you will not compromise your eligibility for these programs.
They are Complicated
While it may sound pretty straightforward, the truth is, there are lots of rules/caveats associated with reverse mortgages. There are also lots of risks associated with them that may not be worth it. Make sure that you fully understand the terms of any reverse mortgage offer before you accept it.
Is a Reverse Mortgage Right for You?
A reverse mortgage can help, but it’s not for everyone. There are some factors that may make it worth it:
- Home is considerably increasing in value
- You plan to remain in your home for a long time
- You can afford the costs associated with the reverse mortgage
Ultimately, you must decide if taking out a reverse mortgage is right for you. At Covenant Mortgage Services, we are committed to helping our clients understand the ins and outs of reverse mortgages. We work with you to find the best solution to meet your goals and needs. If you are in Columbia, SC, please contact us today to learn more about how a reverse mortgage fits in with your financial picture.