There are many ways for older adults to fund retirement, and one that has seen a lot of commercial time lately is the reverse mortgage. It sounds simple: just convert some of the equity in your mortgage to cash. But in fact, a reverse mortgage can be complicated and may not be the best choice for everyone. Before jumping aboard the reverse mortgage bandwagon, here are several tips to help homeowners make the right decision.
Paying for Senior Living:
Understand how it works
A reverse mortgage is a means of turning home equity into cash without having to sell the home. However, this cash is actually a loan that will have to be repaid, either by the homeowner when the home is sold or they move out or by the homeowner’s estate. On the upside, the money received in a reverse mortgage is usually not taxed nor will it affect Social Security payments and the homeowner keeps the title to the home.
The most common type of reverse mortgage is the home equity conversion mortgage or HECM, which is insured by the Federal Housing Administration. According to the Investopedia article, “Home Equity Conversion Mortgage (HECM),” HECMs have a list of borrower requirements for eligibility including:
- Must be aged 62 or older.
- Must own the property 100% or have considerable equity.
- Must occupy the property as the principal residence.
- Must not be delinquent on federal debt.
- Must have the financial resources to continue to pay for maintenance, property taxes, homeowner’s insurance, association fees, etc.
- Must attend a HECM information session given by a counselor approved by the federal Housing and Urban Development agency.
Yes, there are upfront costs
As with any major financial transaction, there are also upfront fees to be aware of before deciding to go ahead with a reverse mortgage. According to consumerfinance.gov’s article, “How much will a reverse mortgage loan cost?,” reverse mortgages are typically more costly than other types of home loans. Upfront fees include:
- Origination fees paid to the lender, which cannot exceed $6,000.
- Closing costs, which are similar to those required in a real estate sale and that cover costs of an appraisal, title search, necessary surveys and inspections, credit checks, mortgage taxes, recording fees, and others.
- Initial mortgage insurance premium charged by the lender and paid to the FHA. This insurance is in addition to homeowner’s insurance and provides a guarantee that the homeowner will receive the reverse mortgage loan payments.
These costs can be paid in cash or from the loan proceeds. Using money from the loan, however, means the total loan amount will decrease by that much right at the start.
Ongoing costs should also be considered
A reverse mortgage is essentially a loan from the pool of home equity and as such there will be interest to be paid on that loan, the same as with a regular mortgage. The difference is that with a typical mortgage, the borrower pays the principal and interest down month after month, while with a reverse mortgage, the borrower receives the principal each month but pays no interest until the loan comes due as noted above. Obviously, the lower the interest rate, the less will be due at the end of the loan period.
Another ongoing cost is the mortgage insurance, an annual premium that for HECM borrowers accrues over the life of the loan and also must be paid when the loan payoff is due. Borrowers can expect to pay a small monthly servicing fee as well.
It’s very important to remember that a reverse mortgage requires upkeep of the property, as well as the payment of associated fees, taxes and insurance. The reverse mortgage introduces a new lienholder to the equation so upkeep and ongoing payments will be included in the terms of the mortgage and violation of these terms can result in foreclosure. Learn more about ongoing costs of reverse mortgages in theamericancollege.edu article, “Reverse Mortgages: Ongoing Credit and Costs.”
Paying for Senior Living: Other reverse mortgage considerations
A reverse mortgage is a good idea for those who plan to remain in their home for a long time, especially those who have built up the equity in their home by paying off their mortgage. For those who are considering a move to another home or senior living community in the short term, a reverse mortgage is probably not a good financial move.
For those who want to leave an inheritance to their children, a reverse mortgage will lower the amount available, with the possible exception of homes in areas where home values are steadily increasing and the sale takes place at the right time.
For more about reverse mortgages, the Federal Trade Commission’s article, “Reverse Mortgages,” is a great source of information and is available in Spanish as well.
For seniors who are looking for more about how to pay for their retirement years, check out our Family Guide to Funding Senior Care and Housing Guide. To learn more about North Chandler Place and our housing choices and amenities, contact us today.