Reverse mortgages are a relatively recent product on the lending scene. The approval process is somewhat abbreviated compared to a traditional home loan, but there are some conditions and requirements that make a reverse mortgage unique to other home loans.
What Is a Reverse Mortgage?
It is a home loan that enables the homeowner access to the equity built up in the home. Some borrowers prefer a lump sum when taking out equity. Others choose to receive monthly payments. No payment is required on the reverse mortgage until the homeowner dies, sells the home or vacates the home for more than 12 months - e.g., to go into an aged care facility. At that time, the reverse mortgage must be paid off, either through the sale of the home or reimbursement from loved ones who will be taking possession of the home.
Am I Qualified?
The primary prerequisites for a reverse mortgage are that borrowers be 62 years of age or older and have equity built up in their homes. The U.S. Department of housing and Urban Development (HUD) requires that the borrowers of these mortgages obtain financial counseling from a HUD-approved third party prior to finalizing the note. Upon release of funds, the previous mortgage must be paid off. In most cases, borrowers may use the funds leftover from the equity of the home in whatever way they wish.
What Are the Advantages?
The greatest advantage of is that the borrower has full access to the equity built up in the home. With medical costs at all-time highs and diminished medical for seniors, many take out a reverse mortgages to pay for ongoing medical bills that are not covered by Medicare or Medicaid. Others do not have extended family to leave their estate to, so they take out these mortgages for vacations and other recreational activities and products, so that they may enjoy their twilight years.
In the past, seniors often agreed to a reverse mortgage without understanding the consequences. The results were devastating to many when they realized they had little or nothing left to pass on to their children. HUD now requires all those considering a reverse mortgage to undergo financial counseling, so that seniors understand exactly what they are getting into prior to agreeing to a mortgage.
What are the Disadvantages?
There are many disadvantages of a reverse mortgage. Many seniors have worked hard all of their lives to achieve financial independence and provide a legacy and inheritance for their children. Although having access to the equity in the home will provide greater financial opportunities, the legacy and inheritance will be impeded upon and diminished.
Some homes are not qualified, and other homes must adhere to strict requirements - e.g., a mobile home must sit on a concrete base, among other constraints. Astonishingly, lenders can lawfully charge loan origination fees up to $6,000. Interest continues to accrue on the loan for the remainder of the homeowner’s life, or until the home is sold, and is added to the lien on the property through the reverse mortgage agreement.
If you are considering a reverse mortgage, talk to your family members first. Include your children in the discussion. There may be other options you can pursue without having to tie up your home in a loan that will reduce the equity you’ve worked so hard to build up in your home.
Ki graduated from college in Austin Texas, and never left. He created a website to provide information on the Austin real estate market to future buyers. Anyone can search homes in the Austin MLS on his site. He also writes a blog looking at trends for Austin Texas real estate.