Is a Reverse Mortgage Right for You?
You see many commercials for how wonderful a reverse mortgage can be—but are they that wonderful? Maybe. A reverse mortgage can provide money for people over age 62 who have significant equity in their homes. When a person has a regular mortgage, the homeowner pays the mortgage company each month. In a reverse mortgage situation, the lender actually pays the homeowner every month. The loan is repaid when you die, sell your home, or when your home is no longer your primary residence. The proceeds of a reverse mortgage generally are tax-free, and many reverse mortgages have no income restrictions.
All that sounds pretty good, but it is important to remember that with payment the lender makes to you, the less equity you have in your house. For some, this is not a concern. For others, if they plan to leave their home to loved ones or if they plan for beneficiaries to benefit from the value of their home in the future, they need to be aware of the fees and possible hidden costs a reverse mortgage may include.
Three Types of Reverse Mortgages
There are three types of reverse mortgages: Single purpose mortgages, federally-insured reverse mortgages, and proprietary reverse mortgages. Single purpose mortgages are offered by state and local governments and nonprofit organizations. They tend to be the least expensive option but are usually limited to a specific purpose such as making home repairs or paying property taxes. There are often income requirements as well, but generally people with low to moderate income levels will be eligible.
Federally-insured reverse mortgages are backed by the U.S. Department of Housing and Urban Development and are also known as Home Equity Conversion Mortgages (HECM). Proprietary reverse mortgages are private loans that are backed by the companies that offer them. Both of these types of reverse mortgages generally do not have any limitations for how the money may be used and have no income or medical requirements. They may include high up-front costs or fees though. If you do not plan to be in your home for a long period of time, the up-front costs may not be worth the money you will receive from the reverse mortgage.
One difference between the federally-backed reverse mortgages and the privately offered mortgages is the requirement for counseling. Government and nonprofit organizations often require that borrowers attend a counseling session with an approved counselor who will review the real costs and risks involved in a reverse mortgage. Reverse mortgages can be a quick financial fix for people who need money for medical expenses, home repair and property taxes, or just need to pay monthly living expenses. Understanding the real costs and fees of these mortgages is necessary to prevent people from jumping for a quick fix which may cost them more in the end.
Compare Costs, Restrictions, and Payment Options
An individual considering a reverse mortgage should compare the costs and payment options offered by different reverse mortgage companies. There are several payment options for a reverse mortgage, including:
· a “term” option – fixed monthly cash advances for a specific time.
· a “tenure” option – fixed monthly cash advances for as long as you live in your home.
· a line of credit that lets you draw down the loan proceeds at any time in amounts you choose until you have used up the line of credit.
· a combination of monthly payments and a line of credit.
Consider Your Overall Financial Situation
When deciding whether a reverse mortgage is right for you, you should also consider your entire financial situation and the impact any decisions might have on your estate and your eligibility for Medicare. Generally speaking, reverse mortgage loan advances do not impact your Medicare payments or your social security, but they may impact other types of benefits to which you might otherwise be entitled. You can live in a nursing home for 12 months before you have to start paying back a reverse mortgage.
There may be better options for getting income or cash, including tapping into retirement income or learning to maximize social security and pension payments. An experienced estate planning attorney can help you make a plan for your estate and can work with you and your financial advisor to make the most of your assets to work for you now and to protect the financial future of your loved ones.
Know the TALC of all Potential Lenders
All HECM lenders are required to follow HUD rules, but lenders have different costs for origination fees, interest rates, closing costs and service fees. While there may be more restrictions and protections for people who borrow from government-backed lenders or nonprofit organizations, homeowners in a high-valued home may be able to borrow more money with a proprietary reverse mortgage. Costs may higher as well.
It is well worth your time to research all your options and to fully understand all the costs and requirements involved in each reverse mortgage from different lenders. The best way to compare across different lenders is to get the Total Annual Loan Cost (TALC) rates for each lender. The TALC shows the projected annual average cost of a reverse mortgage, including all the itemized costs. This will help you compare the real costs of different types of mortgages.