You’ve seen the commercials of senior citizens making the claim that reverse mortgages saved them from financial ruin, or that They were able to be financially independent because of a reverse mortgage..Sounds too good to be true right? Maybe, maybe not. We will explore the pros and cons of the Reverse mortgage, so you can make an informed decision that’s right for you.
A reverse mortgage (also known as Home Equity Conversion Mortgage or HECM) is a loan that enables homeowners 62 or older to borrow against the equity in their home, without having to sell the home,or take on new monthly mortgage payments or give up the title.
There is some great advantages to a reverse mortgage. Loan proceeds can be used for any thing they want,such as a vacation, or to pay bills, or a savings account. They can be taken out as a lump sum, fixed monthly payments, line of credit (with the exception of Texas), or a combination of the two. The loan amount sometimes depends on the borrower’s age, interest rates, and the value of the home.
Another advantage is reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s estate.
The Santa Ana, Calif., metropolitan area is the top reverse mortgage market in the country with 5,825 loans funded followed by Los Angeles, Sacramento, and Coral Gables, FL
The NRMLA (National Reverse Mortgage Lender Association) attributes the growth to several factors, including high home appreciation rates in many parts of the country, which allow seniors to access greater amounts of equity; more lenders offering the product (NRMLA now represents about 500 firms nationwide compared to 370 last year at this time); and greater acceptance of reverse mortgages as a wealth management tool. NRMLA is a nonprofit trade association, based in Washington, DC, whose members make and service reverse mortgages throughout the U.S. and Canada.
So You’re asking What are the disadvantages? The most important disadvantage is high fees. Reverse mortgage origination fees can be very steep. For example, the benefit of never having to repay more than the value of the home comes at a very dear cost: special insurance premiums be paid at closing and throughout the life of the loan. Origination fees can be financed as part of the overall loan package, but many seniors still see the fees as excessive, especially when compared to other forms of home equity borrowing that have very low costs.
Another important disadvantage of reverse mortgages is it reduces the home equity amount you leave to your children or grandchildren, and if the loan is not repaid in the event of your death, your heirs will have to pay off the balance plus the interest.
Even greater still, if you consider applying for Government assistance and have a reverse mortgage, you may not qualify because having a reverse mortgage it is considered income.
Taking all of the pros and cons into consideration can still make the decision to obtain a reverse mortgage rather confusing to the average senior. Luckily, there is help for those who wish to explore this option. FHA (Federal Housing Authority) funds housing counseling agencies throughout the country who can give you advice on reverse mortgages. Seniors can call HUD at (800) 569-4287. You can also contact the HECM counselors from FHA’s National HECM Counseling Network. They can provide face-to-face and telephone counseling nationwide. If you want further assistance, call 1-800-CALL-FHA