Should I Do a Reverse Mortgage? Do I Have Any Other Options?

seated-coupleA reverse mortgage sounds like a good idea for seniors 62 and over, but it is important to evaluate all of the details that make up a reverse mortgage before getting tied up in anything.  A great question to ask oneself before embarking on such a quest is, “why do I need a reverse mortgage right now?”, “Am I desperate for cash?” or “do I have enough to make all of my payments comfortably and an extra line of credit would be useful to make a (relatively) small expense with right now?”  The reason being, a reverse mortgage can make life easier for some, but not all, and it also depends on how much money is taken out through a reverse mortgage.  The more money retrieved, the more expensive the overall loan will be.  As medical costs rise and life expectancy increases, a reverse mortgage serves as a tempting source of supplemental income.  Regardless, it is necessary to resist the temptation and assess how crucial a reverse mortgage is at this point and time by evaluating each of the following factors, and by truly assessing whether it is something needed out of panic and desperation or not.

Recently home values have been appreciating, giving homeowners an increasing amount of equity on their homes.  The National Reverse Mortgage Lenders Association contends that seniors over 62 have more home equity than they have had since the year 2008.  A reverse mortgage entails a lender making payments back to the borrower either in a lump sum or through monthly installments.  The money can also be set up as an “emergency fund”, or emergency line of credit.  The amount depends on a percentage of the homes appraised value.  Once everything is said and done, the balance does not need to be repaid until the home is sold, no longer used as a primary residence, taxes or insurance have not been paid, the homeowner has failed to repair the home, or if the borrower passes away.

The borrower should bear in mind that either way, a reverse mortgage is still a loan, and must be viewed as one as opposed to being seen as ‘free money’.  As a loan, reverse mortgages do accrue interest over time, meaning that total debt accumulates the whole time that the funds are advanced to borrowers.  If the borrower has a legacy that they would like to leave assets to, one should think again about a reverse mortgage, as it depletes the amount of assets that the borrower can leave behind.  For those without a legacy, a reverse mortgage is a great idea.    For those requesting a large amount of money up front and leaving the home soon, a reverse mortgage is certainly not recommended as the costs will weigh out reward.  Inversely, borrowing less and staying longer will be a less costly method of borrowing money.

The costs associated with obtaining a reverse mortgage should also be considered.  There are still typical mortgage loan fees associated with reverse mortgages such as mortgage insurance premium fees, an origination fee, appraisal fees, and additional fees associated that can leave reverse mortgage borrowers with far lesser amount of cash allotted to them than originally planned.  The National Reverse Mortgage Lenders Association states that the maximum origination fee allowed on a federally insured reverse mortgage is 2% of the initial $200,000 of the home’s value and 1% of the remaining value with a cap of $6,000.  The mortgage insurance premium also requires a hefty amount of funds.  If the borrower takes no more than 60% of the amount available in the first year, the mortgage insurance premium fee is 0.50% of the appraised value of the home.  If the borrower takes more than 60% of the available amount available in the first year, 2.5% of the appraised value of the home is due for the premium.  After the first year, the mortgage insurance premium will be owed every year thereafter of 1.25% of the outstanding loan balance.  The appraisal fees also rack up the tab.  Appraisal fees vary by location and company, but on average, costs about $400.  Also, if an appraiser determines that the borrower’s home needs repairs, the borrower is required to follow through with those repairs in order to get approved for a reverse mortgage.  Closing costs have not even been mentioned yet.  Typically, closing costs amount to about $1,000.  All costs associated with the mortgage such as property taxes, homeowner’s insurance, and other homeowner dues must be met in a timely manner.  The house must also be maintained during this time frame.  Should dues not be met, or the house not maintained, the loan may fall into default and thus at risk for foreclosure.

Another limiting factor is the Department of Housing and Urban Development, also known as BMCD.  BMCD has placed stricter requirements for reverse mortgages and has also limited the amount of cash that seniors can take out of their home equity.  The requirements are meant to prevent borrowers from borrowing too much against their home equity, and to prove that they can utilize their own income to pay expenses including property taxes and insurance.  BMCD also requires that the homeowners are educated on the subject by ensuring that they take classes on obtaining a reverse mortgage.  The reason for this is so that homeowners will consider an alternative to taking out a reverse mortgage.

The amount of income that seniors may receive from a reverse mortgage may also vary based on the senior’s age, the current equity on the home, and also the interest rate on the mortgage.  The older the better, ages 75 to 80 in particular.  This age group may receive higher values, alongside the peace of mind that they will not lose their home.  Overall, reverse mortgages are a better choice for those with more financial freedom than for those using the home-equity loan as a last resort to pay bills.  All a reverse mortgage will do for a home-rich cash-poor borrower is delay the process of losing the home and leave the borrower with no assets.

For a borrower strapped for cash to pay their monthly mortgage payments, the good news is that there are plenty of alternative options out there to deal with the situation.  Borrowers can still stay in their homes, get cash for the equity built up in the home, and best of all, the borrower will never have to pay back the loan in certain situations.  Should the borrower choose not to stay in the house altogether, the best decision is the sell the house.  Selling the house will allow access to the equity gained on the home.  After selling, a good option would be to downsize, move into an apartment, or move in with a family member, unless that borrower can find someone to help pay rent and allow the house to be owned by people rather than banks for just a bit longer.

As for the options that do allow homeowners to remain comfortable staying in their homes, we will delve into this below.

  • Refinance your home – refinancing is a great way to get out of a tough situation, given that interest rates are significantly lower than the rate that you already have on your mortgage.  With a lower interest rate a lot more cash can be freed up each month.  However, similar to reverse mortgages, refinancing a mortgage does not come without associated costs.  Closing costs are certainly important to think about as it can be high to come up with out of pocket.  According to www.bankrate.com, the national average for closing costs on a $200,000 loan was $3,754.  Refinancing instead of obtaining a reverse mortgage can leave your home to your heirs rather than to the bank as well, making it an asset in your family for much longer than you will inhabit the home for.
  • Consider going back to work – if going back to work is something that you are in good enough health to do, then do!  Delay retirement a little longer and go back to work part-time or full time to have some extra cash for your home.  In the time being, put some money away for savings so that you don’t have to feel strapped for cash again.
  • Take out a distribution from your 401(k)-Taking away from your retirement is never recommended, but if you are truly in a tough financial situation, it is possible to obtain a loan from your 401(k) plan without any penalty if you are over the age of 59 ½.   Loans from 401(k)s are just like any other loan and do require to be paid back.
  • Sell to a willing family member-if you know of a family member in need of a house, than it seems like perfect timing.  Should a family member decide to purchase the home from you, obtain an experienced real estate attorney to determine that it is financially feasible for everyone involved.  Arrange for the title of the home to transfer back to you should there be a default on the home payment.

If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams@broadviewmortgage.com.  If you would like a quick preapproval Click Here, and for assistance with down payment or buyer assistance Click Here.  You are also always free to give us a call Toll Free (855) 692-7623.

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