How do you know if it’s right for you?
More and more retirees, hit hard by the downturn in the stock market, are turning to the once-controversial reverse mortgage to tap into their home’s equity and boost their monthly income.
A reverse mortgage is a special type of home loan that lets seniors convert a portion of the equity in their home into cash, according to the U.S. Department of Housing and Urban Development.
Unlike a traditional equity loan, a reverse mortgage does not have to be repaid as long as the borrower lives in the house. There are no qualification requirements based on assets, income or credit score.
To be eligible, homeowners must be 62 years of age or older, own their home outright or have a low mortgage balance that can be paid off at closing with proceeds from the loan.
Linda Covinsky, a certified reverse mortgage consultant with Hilton Head’s Home Mortgages Unlimited, an affiliate of Wells Fargo Home Mortgage, said, “The biggest advantage is if a person already has a mortgage, they can eliminate it. If their house is paid for they can get money monthly or a lump sum.”
Mortgage consultant Nick Kristoff said, “Reverse mortgages allow you to take advantage of your equity without having to qualify for an equity line. It’s great for someone who wants to stay in their home but needs extra revenue.”
The amount of money you can borrow is based on your age, the appraised value of your home and the current interest rate. It can be distributed as tax-free monthly payments for life, as a lump sum, as a line of credit, or some combination of the three. While there are no monthly mortgage payments, you are still responsible for paying real estate taxes and insurance on your home.
“It’s not free money,” Kristoff said. “You pay interest on the loan just like you do with any mortgage. The balance will go up because of that interest.”
If you should decide to sell your home, you or your estate will need to repay the cash you received from the reverse mortgage, plus interest and other fees. The remaining equity in the home, if any, belongs to you or your heirs.
So why all the controversy?
“It’s the unknown,” said Beach First National Bank mortgage lender Michelle Wilson. “People don’t know how the program works.”
Like any mortgage, there are fees and expenses incurred when taking a reverse mortgage. You can pay most of the costs from the proceeds of the loan. Of course, financing the closing costs reduces the amount of cash you will receive.
Under the FHA’s Home Equity Conversion Mortgage, which accounts for most reverse mortgages made in the U.S., borrowers also are charged an up-front mortgage insurance premium as well as a monthly premium based on the mortgage balance.
To ensure homeowners fully understand the advantages and disadvantages of a reverse mortgage, the program requires that borrowers receive free or low-cost counseling from a HUD-approved reverse mortgage counseling agency before applying for the loan.
If you plan on moving within two to four years, a reverse mortgage may not be the best way to go,” Wilson said. “It’s a great product, but it’s not for everyone.”
ADVANTAGES OF A REVERSE MORTGAGE
- Homeowners can get cash from the equity of the home without incurring monthly expenses.
- Lenders cannot force homeowners to sell the property to pay back the loan.
- Reverse mortgages guarantee that the homeowner can stay on the property for as long as he or she lives. But be careful about:
- Reverse mortgage fees. They can be high, although the fees are often rolled into the loan and not paid up-front. Because HUD is the program administrator, all fees are fixed.
- Do not apply for a reverse mortgage from any company that is not approved by HUD.
Source: Consumer Reports