Homeowners 62 and up can apply for a reverse mortgage to access the home equity without making monthly mortgage payments. This mortgage option may be a welcome relief for retirees struggling to make ends meet. It's useful for retirees who wish to protect themselves from market volatility and the possibility of outliving their funds.
The fees and interest on a reverse mortgage can eat up a sizable chunk of your home equity. The homeowner, partner, and potential heirs may risk losing their home and all of their financial assets due to the loan's stipulations.
What's A Reverse Mortgage?
Homeowners over the age of 62 can use a reverse mortgage to access the equity in their house. Most reverse mortgages include FHA insurance, meaning that the agency will cover the loan cost if the borrower defaults.
A borrower who wishes to take part in a reverse mortgage must pay a one-time insurance premium equal to five percent of the loan's original value and a 0.5 percent annual premium on the loan balance, as required by the government. These premiums support the FHA reserves.
Exactly How Do Reversible Mortgages Function?
If you qualify for a reverse mortgage, you can access cash without having to worry about getting hit with a charge immediately.
If you borrow $100,000 at 6.71% interest for 30 years, your monthly payment will be $648 with a conventional mortgage (principal and interest). A reverse mortgage loan of $100,000 has no necessary monthly payments toward principal or interest.
This must be a joke. Okay, sure. You still have a financial obligation. In other words, you won't have to make any payments until you either sell the house or leave the area permanently (or die). If the latter is the case, your spouse or heirs may have to sell the home to pay off the reverse mortgage.
Reverse Mortgages Have Advantages
Retirement Helps You Budget.
After retiring, many people's income drops drastically; for many, the home payment is the single most significant expense. Paying the bills and living well in retirement is possible with the help of a reverse mortgage.
Stay Calm About Changing Location.
Because of the reverse mortgage, you can stay in your home as you get older (and potentially stay near friends and family). A reverse mortgage includes costs, but it could be cheaper than selling the house and buying something else or finding a new place to rent.
Having This Money Coming In Won't Result In Any Tax Liability.
Because the Internal Revenue Service considers the money you get from a reverse mortgage to be "loan proceeds," you do not have to pay taxes. However, before committing to a reverse mortgage, it's essential to consult a tax professional to ensure compliance with the requirements.
If The Sum Exceeds Your Home's Worth, You're Covered.
Eventually, the total amount owed on a reverse mortgage may rise to more than the home is worth. Because of the nature of a reverse mortgage as an example of "non-recourse" finance, the total amount of debt that must be repaid will never exceed the property's value. As a result, your mortgage lender can't come for any of your other possessions or heirs.
Reverse Mortgages Have Drawbacks.
It's Not Free, Unfortunately.
Loan origination fees for reverse mortgages are set at $6,000 and range from 1% to 6% of the loan amount. Other prices associated with reverse mortgages include FHA insurance premiums and closing costs. Borrowers can add these expenses to their loan balance, but doing so will increase their total debt and decrease their equity. You'll also have to pay monthly servicing costs, which can add up to $35 if your interest rate changes every month.
You Can't Deduct Loan Interest Until You Pay It Off.
When you were making payments on your mortgage, you could deduct the interest from your taxes; however, with a reverse mortgage, you will not be able to do so. Only when making regular principal payments, may you take advantage of this benefit.
One Option Is To Foreclose On Your Home.
Foreclosure may appear unthinkable with a reverse mortgage because there are no monthly payments for principal and interest. This is not the case, however, as foreclosure can occur if you fall behind on property taxes, homeowner's insurance, or HOA dues.
Conclusion
Some schemes that target older adults with reverse mortgages have given the industry a bad name. Even reputable businesses have resorted to deceptive advertising to encourage homeowners to seek reverse mortgages. American Advisors Group, a significant player in the reverse mortgage industry, was hit with a $1.1 million fine and a complaint by the Consumer Financial Protection Bureau in late 2021 for engaging in misleading advertising practices.
