Have you ever wondered if reverse mortgages are some sort of scam?
Maybe you’ve heard of these lending instruments, but they seem too complicated to wrap your head around.
If you’ve ever wondered about selling your home, refinancing, or just finding a way to raise a little extra cash to help you through your retirement, this might be of some interest to you.
As a disclaimer, I’m not trying to sell any mortgages. I’ve interviewed mortgage experts for the sole purpose of delivering you some of the facts, to help you better understand this lending vehicle.
Over the past several years, I’ve seen a lot of different things in the home lending world. Among these have been double-digit rates, bridge loans, sub-prime mortgages, and yes—reverse mortgages.
Some of these, are things of the past. Though, some of them might still come back, like high interest rates.
Since reverse mortgages have gone through some changes in recent years, lets dive into them, and see what they are, how they work, and if they are a potentially useful tool for you.
Are Reverse Mortgages a Scam?
Definition: Reverse Mortgage
To understand a reverse mortgage, let’s work backwards. I’ll assume that you know how a regular mortgage works. You pay each month towards your debt, part of that money covers interest on the loan, part of it pays off principle, which builds up equity, and then there are a few extra expenses that cover things like insurance and property taxes.
Pretty simple, right?
A reverse mortgage is a little different but follows similar principles.
First: It assumes that you’ve already paid off all or a large chunk of your home. It might also assume that you have a large amount of equity, even if you haven’t paid off much of it. This would be due to the value of your home going up, which in this market, most of our homes have increased in value over the last decade.
Second: A reverse mortgage flips the traditional mortgage backwards, so that your home returns money to your pocket, instead of you paying into it. The insurance and property taxes are the only exception. You still pay those.
But how is this possible? It’s pretty simple, and even safe, though there are a few things you’ll want to consider before going that route.
The 12 Nitty Gritties
- Most, but not all reverse mortgages are federally insured, meaning that, these are legitimate lending vehicles that are backed by the United States Government.
- You can purchase a home or refinance your home with one of these loans, you just need to be 62 years or older.
- Under most conditions, you will still be eligible for Social Security and Medicare.
- You keep your home. The title is under your name, not the banks. This means that if you want to sell it in the future, you still can.
- While some of these loans can have a maturity date, the bank will never require more money from you than your house is worth.
- These loans are for houses, which generally includes anything from single-family detached, up to 4-plex attached homes, and even FHA approved condos.
- Like a regular mortgage, there are some credit requirements, which a lending officer would need to verify.
- Also, like a regular mortgage, there are property requirements that your lending officer would need to verify.
- This is not for vacation properties. You need to live in the house for at least 6 months out of the year, making it for your primary house only.
- Naturally, there needs to be some equity in your home. Depending on interest rates, your age, and other possible factors, you should probably have about 40-60% equity in your home to qualify for a reverse mortgage.
- The value of your home cannot exceed $726,525
- There’s a few other piddly requirements, like you need to meet with a reverse mortgage counselor to ensure that this is a good option for you. Frankly, this isn’t a bad requirement. It would be unfortunate to enter into a long-term loan of any sort and not be fully informed of how it might affect your financial future. And of course, the government isn’t going to support this sort of loan for you, if you owe the government a bunch of money and haven’t paid up.
Why would I do this?
You might be thinking, “I’ve spent so many years trying to get out of debt, why would I want to give up all that equity now?”
It’s true, a reverse mortgage reduces your equity. That seems very counterintuitive to what we’ve been told our whole lives.
But unlike a regular mortgage, where if you lose your job, you lose your ability to pay your mortgage, and subsequently, you lose your house, a reverse mortgage doesn’t require you to pay any more than the smaller fees for taxes, insurance, and HOA dues (if applicable) each month. After all, this type of loan is for people who are NOT working, because they are retired, or close to it.
Also, as long as you remain current on those smaller expenses, you continue to own your own home, Eventually your equity position might go down to zero, but even then, the bank cannot take your home away until either you permanently move out, at which time, they will pay you or your kids the remaining equity left in your home. If there is negative equity in your home, you and your kids are not required to pay it. That’s where having a federally insured loan comes in handy. The government insures that you will not owe a dime when all is said and done.
Your kids can also have the option to buy the home for 95% of the appraised value, when you move out or die.
Most people consider reverse mortgages for the following reasons:
- They find themselves at retirement and are unable to buy a new home more suitable for their needs.
- They own their home outright, but are homebound because of a restricted budget that doesn’t allow for any vacations or traveling.
- The market is hot, and they can get more money out of their home now to use as a safety net for future needs
- They like to have extra cash on hand to take advantage of investment opportunities.
- They can have the ability to help kids or grandkids with school. This may also apply to helping with down payments on a house of their own.
Most people are afraid of reverse mortgages for the following reasons:
- They will have less money to pass on to their children when they die.
- These people are afraid that this is a sneaky trick of banks to steal their homes away.
- They have an emotional attachment to having their home paid off.
- They don’t understand how it works.
You might be asking, “Can’t I just get a home equity loan if I need cash in a pinch?”
While it’s true that most peoples’ first thought is a home equity line of credit, you have to remember, that when you withdraw money on that sort of loan, you have to make regular monthly payments again, until you completely pay back the loan. This is great for younger working families and individuals. But for retirees on a fixed income, this can be very difficult.
Is it worth it?
This is a decision that everyone has to make on their own. There are pros and cons to this decision, things that need to be thought out carefully. That’s why visiting with a financial planner might be a good idea.
For example, your kids might not get much of an inheritance. But think about you and your parents. Would you rather that they lived more comfortably throughout their retirement, and had the ability to go on vacations once and a while, or been able to visit family more often? Chances are, your kids want the best for you too, even if it means less money for them when you die. After all, you earned that money, not them. They’re working, not you. They understand this.
Other things to consider, what are your end of life plans going to look like. For many of us, those last few years might include assisted living homes or memory care facilities. These aren’t fun things to think about, but expecting our kids to take care of us might not be every parents dream. That’s why a financial planner can be very useful. It would be best to make sure that all your bases are covered, with enough left over to handle the worst case scenarios.
For the most part, you shouldn’t be afraid of a reverse mortgage. Like any lending instrument, you need to make sure it matches your long-term plans and financial goals.
For more info on reverse mortgages, please check out this Myths/Facts website that dives into all the misconceptions surrounding reverse mortgages.
As always, I hope this was a helpful and educational article for you. Here at Leisure Villas, we strive each week to produce helpful content that is relevant to our friends and family who are 55 years and better. You can visit us at https://www.leisurevillas.com/
We are not financial advisors. The information in this article is written to the best of our knowledge, based on interviews with industry experts. It should not be taken as financial advice. We always recommend that you visit personally with a qualified expert. They will be able to evaluate your current situational needs and provide the most up to date knowledge and advice. Thank you.