5 things to know before you get a reverse mortgage

Reverse mortgages can be a great way for seniors to access money tied up in their home. A reverse mortgage is a loan for homeowners who are 62 or older and have sufficient home equity. It allows these seniors to borrow money against the value of their home and receive funds in the form of a lump sum, fixed monthly payments, or a line of credit. If the borrower dies, leaves permanently or sells the house, the entire loan balance becomes arrears and payable.

If you think this sounds like an interesting proposition, you are not alone. Reverse mortgages are also becoming more popular, with 43,000 issues in 2020 (the most recent statistics available). This was an increase of 23% over the previous year.

However, you should be aware that reverse mortgages come with risks, obligations and costs — and sometimes it is difficult to hide or calculate them before finalizing your reverse mortgage. In this article, we will take you through these five issues.

  • Sometimes the risks, obligations and costs of a reverse mortgage are hidden or difficult to calculate before you finalize your reverse mortgage.
  • Lenders using high-pressure selling strategies can be a red flag.
  • There are lots of extra fees, which are often inserted into the loan, so they are not immediately clear.
  • You should add your spouse as your co-borrower where appropriate.
  • A reverse mortgage does not mean that your costs are the same: you must pay property taxes and homeowners insurance or you may face foreclosure.
  • Other ways to access your home equity can be more cost effective in the long run.

Some lenders use high-pressure selling strategies

The first thing you should know is that reverse mortgage hunters practice and have a reputation for attracting lenders. Some adults have noticed high pressure on reverse mortgage sales strategies. You should be particularly skeptical if a salesperson advises you to spend money from your reverse mortgage, especially if they suggest placing money on other financial products.

This does not mean that a reverse mortgage is always a bad idea, though. For many people, a reverse mortgage retirement can be a great way to provide themselves with a regular, reliable income. Just make sure you understand all the intricacies of the mortgage.

The reverse mortgage fee is higher

The costs you would pay to take out a reverse mortgage could be much higher than other types of loans against your home equity. Borrowers must pay an origin fee, an upfront mortgage insurance premium, ongoing mortgage insurance premiums (MIPs), loan servicing fees and interest. The federal government limits how much lenders can charge for these items, but the source fee, in particular, can be high – it is limited to $ 6,000.

These fees may not be immediately obvious to seniors thinking about reverse mortgages, as they are often paid from your borrowed money. This means that you will not necessarily receive the money and then pay it to the lender, which may obscure the money you are paying. In reality, this process means that fees and interest are charged on your home equity.

Make sure you understand the residential rules for reverse mortgages and your other obligations If you move away from your home for more than 12 months in a row, even for medical reasons, you may be forced to sell your home. Similarly, if you fall behind with your homeowner’s insurance premium, your lender may predict you.

You should add co-borrowers

It is also important to pay attention to the residential rules when you take a reverse mortgage. A reverse mortgage must be taken against your main residence, this is the place where most of the year is spent. If you leave this residence for six or 12 months in a row, even if due to medical reasons, your lender may terminate your reverse mortgage and claim to sell your home to pay off your debt.

This can be a special problem for married couples who live together, but only one of them is named in the reverse mortgage document. In this case, the spouse may be forced to sell their home to pay off the debt while they are still living there. To avoid this result, you need to make sure that you have added your spouse as a co-borrower, or at least make sure that they can prove themselves as a qualified non-borrowing spouse.

You have obligations

When you are working on whether a reverse mortgage can help you retire, you should consider your property taxes and homeowner’s insurance costs. Most reverse mortgage lenders require borrowers to be up to date on both of these issues. Because your home is their collateral for the loan, and if it is damaged it may not be sold at a fair market price, and this means the lender will not get their money back.

In other words, you will have an obligation to your lender after taking a reverse mortgage. And if you do not meet these requirements, your lender may foreclose your loan. This is a real problem with reverse mortgages. In recent years, 18% of reverse mortgages have ended in foreclosures, according to a 2019 Brookings Institution paper on reverse mortgages. Sometimes it’s because property taxes haven’t been paid. But in most cases it was because the homeowners no longer lived in the house.

There are other options

Understandably, many reverse mortgage lenders will not tell you that there are other – and potentially cheaper – ways to access the equity you create in your home.

These options include:

  • A cash-out refinancing: A cash-out refinancing can help if you want to access a large amount of home equity at once. This means you must pay a lender monthly. However, in the long run, you can save more on your equity than the reverse mortgage.
  • A home equity loan or a HELOC: A home equity line of credit (HELOC) gives homeowners access to home equity. Unlike mortgages, borrowers have to pay for home equity loans and HELOCs. On the other hand, they can bring lower fees and be a less expensive option for reverse mortgages.

The best option for you will depend on your reasons for seeking reverse mortgage. Contacting a HUD counselor may be helpful if you are not yet sure what to do.

What are the downsides of getting a reverse mortgage?

Mainly cost. The reverse mortgage costs include lender fees (origin fees are capped at $ 6,000 and depending on the amount of your loan), FHA insurance charges and closing costs. These costs can be added to your debt balance; However, this means you will have more debt and less equity.

Does reverse mortgage benefit seniors?

Sometimes, but not always. Reverse mortgage lenders have reportedly targeted adults with aggressive sales strategies. 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 retirement income.

How Much Money Do You Make From A Reverse Mortgage?

The income you will get from a reverse mortgage will depend on the lender and your repayment plan. For a HECM, the amount you can borrow is the age of the youngest borrower, the interest rate on the loan, and the minimum claim value of your home, or the highest FHA claim, which is 1 970,800 as of January 1, 2022.

Bottom line

A reverse mortgage can be a great way for seniors to access their home-made equity. However, reverse mortgages can have hidden costs and obligations. It is important to understand these before agreeing to anything.

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