Is a Reverse Mortgage Right for You?
In recent years, reverse mortgages have been enthusiastically marketed to homeowners ages 62 and over. Optimally designed for homeowners with at least 50 percent equity in their home, reverse mortgages allow homeowners to tap into that equity. It can provide them with a regular monthly payment – the complete opposite of a standard mortgage, or an available line of credit for many different uses. Any income a homeowner receives from a reverse mortgage is typically tax-free, with payments continuing as long as the borrower remains in their home. However, if the homeowner moves or the home is sold, the loan becomes due and payable. If the borrower dies, the loan is usually paid back through the deceased homeowner’s estate.
The initial appeal of a reverse mortgage is understandable, particularly for retired homeowners that have a fixed income. However, the reverse mortgage process can be easily misunderstood, particularly as it’s portrayed through various marketing channels. Therefore, it’s important that anyone considering a reverse mortgage meet with a mortgage professional that fully understands the intricacies of a reverse mortgage as well as the possible benefits and ramifications.
There are three types of reverse mortgages available, but the Home Equity Conversion Mortgage (HECM) is a reverse mortgage that is typically backed by the U.S. Department of Housing and Urban Development (HUD). Home equity conversion mortgages can be used for any purpose, offering both fixed-rate and variable-rate reverse mortgage loans.
If you ever find yourself needing a reverse mortgage, be sure to keep the following in mind prior to signing on the dotted line:
- Like any mortgage, reverse mortgage fees can vary, with both loan origination fees and closing costs as part of the cost. Be sure to have complete disclosure on all fees involved prior to finalizing any mortgage agreement.
- Along with standard fees, servicing fees and mortgage insurance may also be required.
- Interest is not tax-deductible on a reverse mortgage until the entire loan is paid.
- Borrowers are required to maintain their home properly, including remaining current on both property taxes and homeowner’s insurance.
- A reverse mortgage is not a good solution if you are planning on moving anytime in the future, as the loan becomes immediately payable once you are no longer living in the home. Upon your death, your heirs will be required to pay any outstanding amount on a reverse mortgage if they wish to retain the home, including any interest owed. If the loan is not paid, it will revert to the mortgage lender.
While there are advantages associated with a reverse mortgage (access to money in a down market, eliminating mortgage payment, etc), you should always speak to a financial professional who can help determine if you are a good candidate for a reverse mortgage prior to making a final decision.
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