Many Americans bank on being able to sell their homes in retirement to help pay for their living expenses. However, many seniors get to that stage and realize they do not want to leave their homes. Or there can be unexpected costs that crop up in retirement. One way for homeowners over age 62 to harness their equity for any type of expense is with a reverse mortgage. However, it is not a traditional home loan. Here are the four most important things borrowers need to know before signing up for a reverse mortgage:
Financial Counseling is Required
To make sure that seniors understand the ramifications of a reverse mortgage, all borrowers are required to participate in financial counseling classes through a government-approved agency. These sessions can be completed in-person or over the phone and are meant to fully explain all the payment options, tax implications, and costs of a reverse mortgage.
The Fees Can Add Up
There are plenty of up-front costs associated with these loans: fees for the counseling class, fees for loan origination, mortgage insurance premiums and closing costs. These are often rolled into the total loan amount, but they can add up to 3-4% of the loan total.
Payments Are Available in 3 Options
The amount of money you can borrow will depend on how much equity you have in your home. Once that amount is determined, you can choose to receive the money in one of three ways: as a one-time lump sum, in equal monthly payments, or as a home equity line of credit that can be drawn down as needed. A lump sum is great if you need the cash for a large specific project or debt, and monthly payments are more appropriate if you are using the money as retirement income. The line of credit would be helpful if you only need the funds for emergencies.
The Loan Must be Repaid
While you do not have to make monthly payments on a reverse mortgage, eventually the loan balance must be repaid. It will come due when you move from the house or after you die. If you pass away, the bank will then take possession of your home as repayment. If you sell your house, however, you must repay the loan from the proceeds of that sale. So, you’ll need to make sure you can get a high enough price to cover the reverse mortgage cost. And if you are planning to leave your house to your children, they will have to repay the loan from their own funds in order to keep the property.
There are many situations in which a reverse mortgage could be a good fit for a senior homeowner. However, there may be other options like refinancing with a cash-out mortgage, selling the home to one’s children, or selling to downsize and keep the extra equity. Whatever the choice, borrowers should make sure they understand all the terms of a reverse mortgage or refinance before making a decision.
Let us know if you or anyone you know is interested in finding out more about a Reverse Mortgage.