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What Are Your Needs - Is a Reverse Mortgage Right for You?
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If you are one of the millions of Baby Boomers whose retirement years are quickly approaching, or if you are 62 or older and want to augment your income; or if you have already retired and are living on a fixed income, you may be thinking of a reverse mortgage as a way to fund your future, maintain your financial independence and security, or pay down your existing mortgage or debts.
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To be eligible for a reverse mortgage, you must be a homeowner, 62 or older, own outright (or have a low mortgage balance that can be paid off at the time of closing with the proceeds from the reverse loan) and live in the home as your primary residence. The reverse mortgage funds may be paid to you in a lump sum, in monthly advances, through a line of credit, or in a combination of the above depending on the type of reverse mortgage and the lender. The amount you are eligible to borrow generally is based on your age, the equity in your home and the interest rate the lender is charging. You retain title to your home with a reverse mortgage. You also remain responsible for taxes, repairs and maintenance. The lender does not take title to your home when you die, but your heirs must pay off the loan. The debt is usually repaid by refinancing the loan into a forward mortgage or by using the proceeds from the sale of your home. Your heirs will keep all of the money in excess of the amount owed on the loan.
Reverse mortgages offer the following advantages for those who qualify.
- Tax-free funds with no restrictions;
- Flexible repayment alternatives;
- No income or asset qualifications;
- No credit qualifications;
Reverse mortgages look particularly attractive right now due to low interest rates, reluctance to cash out nest egg stocks at a loss, or the anxiety of becoming financially dependent upon children or government services. Here are 8 questions you need to ask yourself before determining whether a reverse mortgage is right for you.
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1. How much home equity do you have?
You need significant amount of equity before a reverse mortgage makes sense — partly because the fees and charges are included in the amount borrowed. Also, you can’t borrow all of your equity. Currently, HECM reverse mortgages — the most common and safest reverse loans, because they’re governed by rules dictated by the Department of Housing and Urban Development — base your loan amount on a maximum home value of $ 725,****. You’ll get a portion of that amount, based on your age and going interest rates when you apply. The older you are the more money you can access.
2. How old are you?
You have to be at least 62 to qualify — the amount you can borrow is a factor of the age of the youngest borrower. The older the borrower the more money you can get.
3. Do your children want your house?
When you pass on, the reverse mortgage must be repaid either by your heirs or from the sale of your house. If your heirs don’t care about keeping the home, you’ve got no worries — the government ensures that the loan amount can be repaid by selling the home, even if the home is worth less than the loan amount. But if your heirs want to keep the house, they have to pay the loan amount — even if it's more than the value of the home. So if your kids want to keep the house, consider other options, like having them buy the house from you — either at a reduced price or over time.
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4. What do you need the money for?
You get four basic options when applying for a reverse mortgage:
- An immediate, lump-sum payout of the whole amount available
- A line of credit, which is a lump sum that you don’t tap until you need it
- Monthly annuity payments for life
- Some combination of these three other options.
You need to determine what you need the money for. Pay off the current mortgage and reduce your monthly payments? Fix up the house? Pay off other debts?
5. How stressful are your financial problems?
Be wary if you’re not absolutely sure that the funds you’re getting from the reverse mortgage will be sufficient to solve your current economic woes. Reverse mortgages are perfect for people who are house-rich and cash-poor — but not so cash-poor that the reverse mortgage can’t resolve the problem.
If your problems aren’t as easily solved, you might need another option. A reverse mortgage is going to give you access to just a portion of your equity. If you need it all, you might be better off selling and finding cheaper housing.
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6. Responsibility after the reverse mortgage.
With a reverse mortgage you will retain title to your home and continue to be responsible for paying the property taxes, insurance, and for the general upkeep of the property. You have to make sure that you can afford to live in the house after the reverse mortgage. You still have to pay the taxes, keep the house insured and keep the house maintained.
7. Eligibility.
Depending on how you plan to manage the proceeds from a reverse mortgage, it may affect your continued eligibility for need-based government benefits programs such as supplemental social security (SSI) and Medicaid. You should contact your benefits provider to ask how a reverse mortgage may affect your eligibility, but generally choosing a line of credit versus a lump sum avoids these issues.
8. Lender quality.
Because the HECM is not offered by all mortgage lenders, it is important that you find a lender that specializes in this type of loan. By finding the proper lender, you will save yourself a great deal of stress and have a smooth process.
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