What is a reverse Mortgage
A reverse mortgage is a financial product available to people over the age of 62 that allow them to access equity in their home. Often a reverse mortgage is used to assist people without much other income, and would not be recommended until other means have been exhausted. Regardless, as with all large financial decisions, this one should be discussed with an experienced financial professional.
One of the main benefits of this type of loan is that as long as the borrower lives at the residence, they are not required to pay back the loan. Assuming the borrower lives their until passing away, the amount to be repaid typically cannot exceed the value of the home, meaning any heirs of the estate will not be left with this debt.
A reverse mortgage does come with a number of strict requirements as listed by the National Reverse Mortgage Lenders Association:
- Age – the borrower must be 62 years old.
- The reverse mortgage must be the primary lien on the home, and any existing mortgage must be paid off. If there is an existing mortgage, the proceeds from the reverse mortgage must first be used to pay it off.
- The property must be the borrowers primary residence.
- The borrower is responsible for maintenance, taxes, homeowners insurance, and any other cost associated with caring for the home.
Because a reverse mortgage is not always the best solution, all potential borrowers are required to get free counseling from an independent third party, along with a financial assessment to ensure they are capable of meeting the above requirements.
Reverse Mortgage Pros
There are many reasons people may be interested in a reverse mortgage, but in most cases it is used to pay for some type of unexpected expenses, or to give the borrower extra cash flow to pay for daily expenses.
No Payments – As long as this home remains the borrowers primary residence, there are no payments on the loan. As long as the homeowner can afford to pay for maintenance, insurance, and taxes, the risk of default remains low while increasing their cash flow.
Low Risk – With a reverse mortgage, the borrower typically cannot owe any more than the value of the home. Even if the amount of the loan is higher than it can be sold for at the time of loan repayment, which can help ensure heirs to the estate will have no outstanding debts to be paid.
Flexible Use of Funds – There is very little restriction on what the funds can be used for, giving the borrower flexibility to pay off expenses, or just use the money to increase their quality of life in retirement.
Reverse Mortgage Cons
High Fees – Many times the closing costs associated with a reverse mortgage can be high. As with any mortgage or re-finance, the borrower needs to weigh all the costs associated with the loan before deciding to move forward.
Home Maintenance – As previously mentioned, maintenance, taxes, and insurance must continue to be paid for by the borrower. If any of these lapse, this can be grounds for the loan to come due. Fortunately before taking this type of loan, counseling sessions and financial assessments are completed to help better ensure the borrower can afford these costs.
Keeping The Home In the Family – Sometimes it is important to family members to keep the house after a loved ones passing. If enough money has been taken out on a reverse mortgage, it may complicate the ability of any heirs to keep the house in the future.
Reverse Mortgage Resources
National Reverse Mortgage Lenders Association (NRMLA) – Thier website has more detailed information about specific types, features, and requirement of a reverse mortgage. Check it out at www..reversemortgage.org.
Check out the NRMLA Reverse Mortgage Calculator.
HUD.gov also has a number of resources for those looking for more information regarding reverse mortgages.