As you inch closer to retirement age, we ask one simple question: Are you getting enough out of your home equity? If you’re 62 years of age and older, you may be eligible for a Home Equity Conversion Mortgage. Otherwise known as an HECM, this program allows you to use the home equity you’ve accrued over the years to your advantage.
How Does a Reverse Mortgage Work?
Depending on what you’ve heard regarding reverse mortgages, this program deserves may deserve a second look for older homeowners. Depending on your situation, it might make a lot of sense. Although there is a strong bias towards reverse mortgages, mainly due to misconceptions or bygone reverse mortgage issues, they are not the same as they were 10 years ago.
A reverse mortgage is a special home-secured loan, established in 1988. The purpose of reverse mortgages is 1) to use a portion of your home equity funds tax-free (you will still need to pay property taxes), 2) access these funds without monthly mortgage payments, as long as you meet certain criteria. 3) Leverage profit from any increased home value generated while living in your house.
To qualify for a reverse mortgage, you must meet specific criteria
- Own and live in house as primary residence.
- Pay homeowner’s insurance and property taxes regularly.
- Meet financial eligibility guidelines set by the HUD.
- Complete HUD- mandated counseling.
- Pay off an existing mortgage with the reverse mortgage payout.
- Maintain a home to meet FHA requirements
- *Additional requirements may apply and are subject to change.
If you meet the eligibility requirements, a reverse mortgage can provide cash to
- Supplement retirement income
- Pay for heathcare or emergency costs
- Fund home repairs or renovations
- Pay off large sums of debt at high interest
- Plan long-time financial goals for your family
There are two types of Reverse Mortgages:
- HECM loan-available with fixed or adjustable rate
- HECM for purchase home- allows borrowers to purchase their next primary residence using the equity from the sale of their previous home; still does not require monthly mortgage payments.
What are the benefits?
- Continue to live in and keep the title to your home
- Support financial goals with tax-free HECM proceeds.
- Remove monthly mortgage payments
- Leave remaining home equity to heirs after reverse mortgage is paid off.
- Understand all loan costs upfront without any hidden fees
- Undergo minimal credit checks
- Receive financial cushion on a limited income.
Reverse mortgage rates are comparable to traditional mortgage interest rates. However, a reverse mortgage does differ from a traditional mortgage, a second mortgage, or a home equity loan, which all require a borrower to make monthly principal and interest payments. On the other hand a reverse mortgage pays you, the homeowner — without mandatory monthly payments. While you will have to pay an insurance fee on your outstanding loan amount, adding to the cost of a reverse mortgage, Hopkins points out that reverse mortgages have more benefits. “Mainly, you do not have to make monthly payments. You can make payments if you choose, but the bank cannot foreclose on your house for not making payments like a traditional mortgage.”
Hopkins says, “You are still responsible for property taxes and other housing-related insurance payments.” When you see stories about people losing their homes because of a reverse mortgage, Hopkins explains, it’s not because of failure to pay reverse mortgage payments. It’s the other taxes and payments a person needs to make. If you don’t pay your taxes on a reverse mortgage, you could lose your house — just like a traditional mortgage.
What are the drawbacks?
- Can not be absent from the home for more than 12 months.
- Must maintain home and keep up property and tax insurance payments.
- Required to complete a home inspection before the loan closes and agree to finish all recommended repairs by a certain date.
- May make it difficult or impossible to will a home to relatives or children.
Understand reverse mortgage restrictions, and you’ll go into your new loan agreement with both eyes open. Jeff Hunter, Financial and Mortgage Expert at Simple Thrifty Living, explains that there is a lot to consider before taking on a reverse mortgage. “One must understand that a reverse mortgage is an entirely new loan, with brand new stipulations.” Hunter further explains, “One of the keystones of the reverse mortgage is keeping that said home as a primary residence. Regardless of the reason, you cannot be away from your home for more than 12 consecutive months, even if you have to go into a long-term care facility. This will not only result in the termination of the loan, but the lender will require you to repay all money received, plus interest.”
Another limitation that most don’t realize: “With a reverse mortgage, you will not be able to leave your house to your children. If your children, or other heirs, can pay off the remainder of the reverse mortgage loan in full, they may be able to keep the house,” says Hunter.
Is a reverse mortgage right for you?
Whether to support a fixed income or move toward financial goals for the future, retirement planning is a popular use of the reverse mortgage. For eligible retirees making a financial plan from scratch, Derek Hagan, CFP, CFA, and founder of financial planning firm Fireside Financial, recommends starting by asking why this money is significant to you. This is the time to be honest with yourself, Hagan says. “For example, for one person it might be, ‘I want to ensure that my kids grow up with a better life than I have.’ For another it might be, ‘I want to spend as much time outdoors as possible.’ This should be different for everyone.”
Before meeting with a loan officer, it helps to crunch your personal numbers.
Once a retiree knows their values, they can start setting goals around those values or “guesses,” Hagan says. “Then decide when each of these goals needs to happen and come up with the best guess of what that will cost.” Comparing these long-term financial goals to your net worth — the value of what you owe subtracted from the value of what you own — can aregulate if, and how much, you’ll benefit from a reverse mortgage.
The reality, Hopkins says, is that for the average American 65-year-old couple, their home is going to be their largest asset and cannot be ignored when doing retirement income planning. “While there are a variety of strategies available to seniors, like a traditional line of credit, downsizing, or home-sharing, reverse mortgages can provide advantages that the others do not. For instance, most retirees want to age in place in their home for as long as possible. A reverse mortgage can allow you to tap into your home equity while you still maintain the ability to live in your home throughout retirement,” he says.
If you have questions about easing into retirement, our loan officers are here to make reverse mortgage easy. We can help get your questions answered fast so you can decide if a reverse mortgage is the right choice.
For educational purposes only. Please contact your qualified professional for specific guidance.