I’m amazed at how much misinformation continues about the reverse mortgage in the media as well as those who comment on these pieces. Let me clarify the more common misconceptions.
Borrower’s do still own the home, not the lender or bank! The reverse mortgage is a loan allowing homeowners 62 or older to use the equity while they still live in and own the home. It is a valuable option to consider whether one has no mortgage or a conventional mortgage. If they use the reverse mortgage to pay off their current mortgage the borrower’s cash flow will increase because they no longer have to make the monthly mortgage payment.
Everyone’s situation is different and one should consider their situation looking at ALL options including a reverse mortgage. Get the facts, review information on HUD’s website, meet with a local originator to explore the details and how it will possibly work for your circumstances. As I told someone the other day, one can’t make a good decision unless they have explored all the options.
Closing costs are comparable to any conventional mortgage…I’ve done side-by-side comparisons.
Options for receiving the reverse mortgage proceeds include:
- A Line of Credit (which as a growth rate so more funds become available based on the LOC balance).
- Monthly Payment option – payments made to the borrower as tenure (for the life of the loan), term (an amount determined by the borrower for a specific period of time)
- Lump Sum – funds drawn at closing
- A combination of these.
A lump sum is a little risky but HUD has implemented some restrictions including limiting the amount one can access in the first 12 months to 60%, unless there are mandatory charges such as a current mortgage or judgements that are required to be paid from the reverse mortgage.
Better and more common options include: The line of credit with the growth rate can be a useful retirement planning tool and help pay long term care costs in the future.
The monthly payment options whether tenure or term can provide extra cash needed each month. Maybe one could use an extra $100 or $200 a month so they don’t have to use credit cards to cover living expenses.
Some borrowers do a combination of these, taking some as a lump sum, a line of credit and monthly payments.
It is a loan that does need to be repaid. The loan does need to be repaid when the home is no longer the primary residence of the borrower(s) with some provisions for non-borrowing spouses. If one does not pay property taxes, keep insurance on the property or does not abide by the terms of the loan, the lender may call the loan due and payable. The actual due date on the mortgage is the 150th birthday of the youngest borrower.
The reverse mortgage uses all the equity. While the interest is being added to the loan balance, this allows the senior homeowner the use of these extra funds during the term of the loan. And the advantage of the reverse mortgage is it is a non-recourse loan, which means there is no personal liability to the borrower or their heirs, it is repaid from the value of the home only. If the loan balance is higher than what the home can be sold for when the loan is due, the FHA Mortgage Insurance covers the difference to the lender; the borrower or their heirs or tax dollars don’t cover this difference.
Reverse Mortgages Are Complex. What financial product or even other products aren’t complex if you don’t understand them? Do you understand all the details of a conventional mortgage? Your car loan? Do you understand and use all the features of your smart phone? Yes, there are many details with the reverse mortgage, that’s why it’s important to take the time to understand them and work with a reverse mortgage originator will will take the time educate you and not pressure you.
Get the facts! As with any financial product, or any purchase for that matter, one should get the facts and understand the terms. With the reverse mortgage there are many protections in place including they are required to obtain 3rd party counseling where the counselor explains the product and the terms. The loan officer they are working with should also be explaining the features and terms of the reverse mortgage. Don’t jump to conclusions! Understanding them, they might find the reverse mortgage is a viable option for their situation.
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