The housing crisis brought about a marked surge in demand for reverse mortgages, with many seniors viewing it as a great opportunity to decrease expenses and/or increase income via their home’s equity. Though this product is very useful for some, far too many are taking advantage of it when there are better, less expensive options.
In my previous post I shared what a reverse mortgage is and how it can be of financial benefit. To recap, a reverse mortgage (or RM) is an option offered to homeowners age 62 or older to withdraw the equity from their home. The money is typically tax free, and repayment is usually not required as long as the homeowner remains in the home.
1) Cost. RM lenders typically charge originations and closing fees, plus servicing charges throughout the life of the loan. Should you seek a HECM loan (more on that in a bit) you may also be charged a mortgage insurance premium.
2) Interest rates typically adjust up. Many RM’s have variable rates, which can change with the market. Additionally, since over time you are withdrawing more money, interest is being charged on a growing balance. It’s still a loan.
3) You still have to maintain the home. The reverse mortgage loan can be revoked if it is found that the borrower is not properly maintaining the property, including paying property taxes.
4) The interest rate is not tax-deductible. If both you and your spouse are not listed on the loan, the non-borrower may be able to remain in the home after the borrower passes, but the RM payment automatically stops.
6) Nothing to leave behind to loved ones. Although the lender doesn’t require that the RM loan be repaid via the home’s equity, if the borrower’s family or estate can’t come up with the money the home will have to be sold.
Before you move forward, take the time to speak to a HUD approved nonprofit about your situation, and get their expert advice on whether this is the best option for you and your family. Do this regardless of whether you choose a HECM.
Many of these agencies charge a fee (typically $125 or less), but it’s a drop in the bucket compared with the long term costs. If you truly cannot afford it, let them know and they will help you for free (please only exercise this option if you have no financial alternative. These agencies do not make much money but are committed to helping their community. They want to be sure you have somewhere to turn at all times, so if you or a family member can afford to cover the cost, please save the freebie for those that cannot).
To find a non-profit reverse mortgage counseling firm in your area go to www.hud.gov.
And so it is.