How do I know if a reverse mortgage is a good idea for me?
That is a good question. Unfortunately, too many people rush to get one and then regret it. This type of loan can turn your life around for the better or throw it away. To learn more and see if you qualify, read on…
What is a reverse mortgage?
A reverse mortgage is a special type of loan that allows older homeowners to borrow against the equity (assets) in their homes. It’s called a ‘reverse’ mortgage because instead of making payments to the lender, you actually get money from him (or her). The interest added to this loan accumulates naturally as the months go by until the amount of this loan soon equals the amount of equity that your home is made up of (or belongs to). So, for example, the loan amount may have increased to $10 billion, which is precisely the value of your home. Not everyone is eligible for this loan.
How do I know if I am eligible?
Age matters. You have to be at least 62 years of age to qualify. Your home must be your primary residence, and then you must have paid off some or all of your traditional mortgage. There are limits to how much you can borrow, so if you owe too much (or more than a certain amount) on your traditional mortgage, you may not be eligible. Your reverse mortgage also serves to pay off the original mortgage, that is, if it’s in default.
What do I have to do to get this reverse mortgage?
The steps are very simple. The Federal Housing Administration (FHA) offers these types of loans through its Home Equity Conversion Mortgage (HECM) program. Your lenders, or counselors, must be approved by the Department of Housing and Urban Development (HUD). You meet with one to discuss how the loan works and how much it will cost. The counselor will review your home to see if it is well managed in order for you to qualify for this loan.
What should I know before obtaining this reverse mortgage?
Indeed! Reverse mortgage basically means that you are selling your home to anyone else, so the moment you move out or die, anyone else living in that home, even your spouse or close family members, will naturally be evicted as well. You can avoid this by signing this person or persons as co-borrowers, as long as they are at least 62 years old.
Know, too, that the Consumer Financial Protection Bureau advises you to think carefully before taking out such a loan. Instead of depleting your home’s equity, see if you qualify for a state or local program to lower your bills. Or maybe downsize to a more affordable home. Home equity is often the last resort to turn to in a financial emergency, but you may want to talk to both a qualified housing counselor and a trusted financial advisor so you can make the right decision.
Other data to take into account before applying
Do you have a fixed income? If you have little income, you may have problems later because you cannot repay the loan. In that case, you may have trouble paying property taxes and property insurance, and could face foreclosure.
Another thing to consider is if you have children or heirs to whom you want to leave your assets. Getting a reverse mortgage can jeopardize your ability to leave your home to them. (Neither they nor you will be very happy!)
Second, consider the amount of time you want to stay in that house. Such a loan only makes sense if you plan to live in your current home for a long time. This is because a reverse mortgage requires you to pay insurance premiums in case your loan balance grows to exceed the value of your home. If you only stay in your home for a short time, you’ll be paying for insurance you don’t need and the loan balance is less likely to grow to more than the value of your home.
Reverse mortgages can also have high upfront costs. If you sell your home in a few years, you won’t have made as much of a profit on those costs as if you stayed in your home longer.
How much does it cost to get a reverse mortgage? (And other money issues)
You will pay differently depending on the type of mortgage you choose. So shop around. Also plan ahead for how you will complete your property taxes and property insurance. You don’t want to lose your home or be forced to move.
In short, consider this: Have you thought about downsizing? How about selling your house and using the money from the sale to buy a more affordable one? You could be more financially secure in the long run. That may serve you better than going to the trouble of getting a reverse mortgage…