Reverse mortgages are financial products for retirees who have built home equity over multiple decades. This loan provides homeowners with monthly payments that get deducted from home equity. Some people use these loans to continue living in their current home instead of downsizing or moving to another area. A reverse mortgage can be a good idea for your finances, but it’s important to understand the pitfalls and watch out for scammers.
Wondering how reverse mortgages work? Knowing the pros and cons will help you make the best decision for your finances. This article will provide an example of how reverse mortgages work and explore some of the most common questions.
Understanding Reverse Mortgages
Reverse mortgages reward homeowners with equity in their homes. Reverse mortgages are also known as home equity conversion mortgages (HECM) and work differently from traditional mortgages. Instead of making monthly mortgage payments, you receive monthly payments based on your home equity. As a result, your home equity grows with each monthly mortgage payment and as your home gains value through appreciation.
Reverse mortgages are specifically for homeowners who want to retire. You can only take out a HECM loan if the property is your primary residence. Investors cannot take out reverse mortgages for any of their rental properties.
Receiving monthly payments or a lump sum makes it easier to keep up with the cost of living. This may not be an issue when you have a job, but someday, you may retire and have difficulty staying afloat. A home equity conversion mortgage provides the extra financial strength to keep up with expenses, but this can backfire if you run out of equity in your home.
A homeowner can exhaust their home equity and lose this income source in the process. A homeowner doesn’t have to repay the reverse mortgage while they are alive if they fulfill a few rules. However, the monthly payments come from your home equity, and if you run out, you will need another income source to make up the difference. This can be hard to find for retirees who may be in their 70s or 80s by the time a reverse mortgage’s funds run out.
This risk explains why the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA) require aspiring borrowers to speak with a reverse mortgage counselor before getting started. A counselor will explore ways to approach a reverse mortgage so you can enjoy the benefits and minimize the risks.
Reverse Mortgage Example
A reverse mortgage’s costs add up, but receiving distributions each month to cover living expenses can be worth it. Knowing how much a reverse mortgage can cost and what you can get from your home paints a better picture of what to expect. This example will indicate what is possible.
If you have a $800,000 home with no mortgage loan balance, the estimated closing costs are $16,000. Most HECM loans have combined fees and other expenses equal to 1%-2% of the loan’s value. If you secure a 4.5% interest rate on the loan and expect to live in your home for 20 years, you can receive $3,170 per month from your home equity.
You won’t have to worry about repaying a reverse mortgage. That responsibility will fall onto your heirs if they want to keep the home. Heirs can also sell the home and not pay more than the home was worth. This sale won’t result in new capital for your heirs, but they don’t have to pay any debt that exceeds the home’s value.
Reverse Mortgage FAQs
A reverse mortgage can help you during retirement, but it’s natural to have questions about any loan. Here are some of the most common questions about reverse mortgages.
What are the Requirements for a Reverse Mortgage
In order to qualify for a reverse mortgage, you must meet the following conditions:
- You must be 62 years or older
- The property must be your primary residence (second homes don’t count)
- You need a lot of equity in your home (typically 50% or more)
- You must meet with a HUD-approved counselor before getting a reverse mortgage
Lenders will not review your income or credit score during the application process. You do not have to fulfill a minimum for these areas since the monthly payments come from your home equity, and the loan is due after the homeowner passes away. Once you get a reverse mortgage, you have to keep the property in good condition and keep up with property taxes. Homeowners also cannot fall behind on federal taxes and must clear up any unpaid taxes before getting a reverse mortgage.
What Can You Use the Funds For?
You can use the funds for anything you desire. Some homeowners use these funds to keep up with retirement, while others splurge and embark on a few vacations. It’s not a good idea to excessively spend your funds, especially when you are just getting started. However, the choice is entirely yours. Homeowners do not have to inform the bank on how they intend to use the extra cash. It’s your home equity that you have built up over time. Just make sure you use it well to keep up with expenses and keep track of how much equity you have left.
Do You Have to Live in the Home?
A homeowner must live in the home to take out a reverse mortgage on it. You can only take out a reverse mortgage if the home is your primary residence, and it must remain your primary residence for the duration of the reverse mortgage. If you move to another home, the reverse mortgage will become due. You have to live in the home for at least 183 days for it to be treated as your primary home. Homeowners can take a vacation and go to other locations for a few months if they wish. However, they must abide by the 183-day rule for the property to count as the primary residence. You cannot take out a HECM loan for a vacation home, land, rental property, or any other type of real estate.
Can You Sell/Move Out of Your Home?
You could sell a home or move out of it even if you took out a reverse mortgage. However, the reverse mortgage will be due. A homeowner should review how much cash they will keep after addressing the reverse mortgage and if they can keep up with the cost of living for the new home.
Can I Get Scammed Out of a Reverse Mortgage?
Unfortunately, there are many scammers who trick people into giving them money. Scammers create confusion and a sense of urgency. They often have vague businesses and don’t provide clear answers to basic questions. If a scammer pressures you to get a reverse mortgage within 24 hours to unlock a perk or tells you to chase an investment opportunity with your funds, they are likely scams. Contractors who suggest taking out a reverse mortgage for a construction project and people who request wire transfers are also scammers.
Scammers can get creative, but it’s easier to avoid them with due diligence. Online reviews can shed light on reputable companies and scammers. In addition, you should look for reverse mortgage lenders who have been in the business for many years.
What Happens to the Heirs When I Die?
When you pass away, your assets go to your heirs. While this is simple to understand, a reverse mortgage gives your heirs a few choices. Heirs can either repay the debt and own the home or sell the home. An heir is not required to pay more than the home value for a reverse mortgage loan. For instance, if a home is worth $800,000 and has an $850,000 debt because of a reverse mortgage, the heir isn’t obligated to fill in the $50,000 gap upon selling the home.
Is a Reverse Mortgage Right for You?
A reverse mortgage can provide financial security for retirees and greater peace of mind. It will be easier to keep up with living expenses. While your home equity will decrease with each distribution, your property’s value is likely to increase over time and help you unlock new equity.
You don’t have to worry about repaying the home equity conversion mortgage as long as you follow a few simple rules. You will have to keep up with property taxes and keep the property in a reasonable condition (i.e., make necessary repairs, get the lawn mowed, etc.). A mortgage counselor will walk you through the pros and cons of a reverse mortgage before you get the loan. It can help during retirement and supplement your income, but you should monitor your home equity to ensure you don’t run out. Moving out and seeking a lower cost of living can make it easier to retire smoothly, but not everyone wants to walk away from their neighborhood. However, moving out may be the better choice if you live in an area with high property taxes. Those tax payments won’t go away, and you have to pay them each year to avoid the reverse mortgage becoming due in your lifetime.
When considering a reverse mortgage, it is crucial to carefully evaluate your circumstances before deciding. Choosing a reputable lender that prioritizes customer satisfaction is essential. One such lender is Top Flite Financial, a full-service mortgage lender and a leading originator of Home Equity Conversion Mortgages (HECM) backed by the federal government. Accredited with an A+ rating by the Better Business Bureau, Top Flite Financial is committed to helping homeowners make informed decisions about their finances.
To determine if a reverse mortgage is right for you, complete the online form on this page to request a free consultation with a Top Flite reverse mortgage expert. They will take the time to understand your unique situation and provide personalized guidance tailored to your needs.
