Reverse Mortgage Pro's and Con's

Have you seen all the television advertisements about reverse mortgages? Have you ever wondered if a reverse mortgage is right for me or if I qualify for one of these types mortgages or are they some sort of scam? In this article we will take a look at what a reverse mortgage is, what you must do to qualify for one of these loans and what you can use the money for.

What is a reverse mortgage?

A reverse mortgage is a loan that you take out against the equity in your primary residence. You are allowed to draw against the equity but not all the equity only a portion of the equity that has built up over the years. The amount of money that you can have a loan for is determined by the age of the youngest person that is borrowing, interest rates and the lesser of the homes appraised value, and the FHA lending limit for the county the home resides in.

The borrower continues to retain ownership of the property and they do still have to pay taxes and insurance on the home but they do not have to make any payments on the loan as long as they continue living in the home till they pass away. If you move out of the home to a new home or if you move into a full time care facility you will need to pay back the loan, usually the loan payments would start anywhere from six months to a year after you have left your home.

How do I receive the money from the loan?

There are several ways that you could take the loan payout. You may take the loan amount as one lump sum. You could ask for it to be paid out to you monthly to help with monthly living expenses. You could take it out like a line of credit and draw only what you need, not to exceed the mortgage limit. This money can be used for almost anything, but think it through because it is a loan. Most people use the funds to pay off other forms of high interest debt, use it to pay for medical expenses, they opt to take out monthly payments like an annuity to help pay for monthly expenses, or if funds are tight and you need to do some home renovations the money could be used for this type of thing, You are not really directed to what you use the money for, but again this is a loan so make some well educated choices.

How does the loan get paid back if I do not make payments?

Like I keep repeating this is a loan and it is governed by the Department of Human and Urban Development HUD for short and the Federal Housing Administration FHA for short. Homeowners still retain ownership of the home and like I mentioned you do not have to make any monthly payments. Even if the property value drops you still do not have to make any monthly payments to pay back the loan. So you ask who pays back the government, I am glad you asked and here is the answer. When the loan is called or due, the heir or estate can choose to repay back the loan or they can sell the home and repay back the loan and keep what ever is left of the estate. If the home sells for more than what is due on the mortgage the remaining balance after the reverse loan is paid off go's to the estate as an inheritance.

A reverse mortgage loan is “non-recourse”, meaning that if you sell the home to repay the loan, you or your heirs will never owe more than the loan balance or the value of the property, whichever is less; and no assets other than the home must be used to repay the debt.

Pros and cons of a reverse mortgage.

Pros – Homeowner still owns the home, flexible disbursement options, many times the proceeds can be tax free, heirs of the estate will receive the remaining positive balance of the estate after the reverse mortgage is paid off, if the estate value is less than the reverse mortgage balance the heirs are not responsible for the remaining balance, Interest rates may be less than a traditional mortgage or other types of loans.

Cons - hidden administrative cost, some reverse mortgage programs are very complicated, the value of the estate will be affected and will decrease over time as the proceeds are paid out, FHA mortgage insurance premiums can be expensive.

Alternative to reverse mortgage.

A simple line of credit can be taken against the equity of the home from a local bank. The advantage is that the fees for these types of loans are a lot less. But these loans do require a monthly payment.

Home refinancing is another option, but like a line of credit you do have to make monthly payments. Again the administrative fees are a lot less than a reverse mortgage.

Conclusion.

Reverse mortgages are for some but not for all. Do not just jump into a reverse mortgage make sure you investigate the company that is promoting the program and make sure you read all the fine print. It is also advised that you talk to a HUD advisor since the agent selling the reverse mortgage may not spell out all the negatives to the program and how it will affect the heirs of your estate. It would be best that you talk to a financial advisor or if you have an attorney that is a friend or on retainer it would be best for them to go over the paperwork and the application before you sign any documents.