When faced with daunting expenses paired with a monthly mortgage payment on their home, many retirees consider a reverse mortgage as a way to supplement their income, eliminate their mortgage payment and access needed funds so they may comfortably age in place. A reverse mortgage allows homeowners to access their home’s equity while maintaining ownership, control of the home and continuing to live in their home. Thinking about pursuing a reverse mortgage? Learn more about how a reverse mortgage works and evaluate whether or not a Reverse Mortgage is the right fit here. And as always, your trusted PERL lending officer is available to answer your questions.
What is a reverse mortgage?
This is traditionally an FHA insured mortgage which is available to homeowners’ ages 62 and older that reside in the home as their primary residence. Reverse Mortgages are also referred to as Home Equity Conversion Mortgages or HECMs. HECMs operate differently than a traditional mortgage, in which payments are made each month to a lender. With a reverse mortgage, the lender makes a payment to you based on the value of your home. You retain the title to your home, continue to pay property taxes, homeowner’s insurance, HOA if applicable and maintain your home. A lien is placed on the property and the loan is subject to foreclosure for failure to pay taxes and insurance, to maintain the property and to comply with loan terms.
Funds from a reverse mortgage can be received several ways, including a lump sum, a line of credit or a monthly payment. To determine the best choice, homeowners should factor in their personal situation and how they will use the proceeds from the reverse mortgage. For instance, do you want to supplement your monthly income; do you need to cover a large, one-time expense; or do you want to be able to access funds in case of an emergency? You may also have the option to receive funds in a combination of all three of these options during the life of your Reverse Mortgage.
When applying for a reverse mortgage, you don’t have to own your home free and clear but you must have a substantial amount of equity in your home. If you’re still carrying a small mortgage in retirement, you’ll want to talk to your PERL lending officer for help evaluating all of your options, including the amount of equity you’ll need and the amount of cash you can access through a reverse mortgage.
Just like a traditional mortgage, Reverse Mortgages do have costs associated with them, such as a possible loan origination fee, appraisal fee, and other regular closing costs. In addition, loan-servicing fees may be charged, and a mortgage insurance premium is paid to FHA In all, the total closing costs of a reverse mortgage can range between 3 percent and 4 percent of the home’s value, with the costs mostly financed into the loan and not paid out of pocket. As part of the application process of a Reverse loan, Reverse Mortgage counseling is required. This counseling is done by a third-party counselor who will also cover the key points of the Reverse Mortgage.
In the long-term
Reverse mortgages typically become repayable when the last homeowner dies, but the loan also will need to be repaid if you sell or move out of the home. If you think you might be moving out within five years, you may want to consider other ways to meet your monetary needs meanwhile. The reason? Depending on the closing costs charged, it may take you longer than the 5 years to recoup the upfront closing costs of a reverse mortgage when you move.
Talk to family members
A reverse mortgage might not be the appropriate option if you plan to leave your home to your heirs. Although you may leave your home to your heirs, they will be obligated to pay off the Reverse Mortgage and will inherit whatever equity remains in the home. There is a possibility that all of the equity in your home could be used and the home might need to be sold or refinanced to pay off the loan. However, the Reverse Mortgage is a non-recourse loan, which means, should the Reverse Loan balance be higher than the home value at the time the loan becomes due the homeowner or heirs are obligated to pay a percentage of the appraised value, not higher loan balance
How will you use the reverse mortgage?
A reverse mortgage could be used to fund needed home renovations, medical costs, or ongoing living expenses, so it’s key to known beforehand how the cash will be directed. Your age will play an important role when determining how to use the funds from a reverse mortgage. For instance, if you’re in your early 60s, you likely will want to avoid unnecessary spending, especially if you are concerned about running short on funds later in retirement.
Have you heard about a Reverse Mortgage Loan – HECM for Purchase- to “rightsize” for retirement?
Rightsizing – selling your existing home that no longer fits your lifestyle and buying a smaller, perhaps one story, in a neighborhood you like – can be a great tool to leverage home equity and fund as well as reduce retirement expenses. Rightsizing can also provide quality of life benefits.
If you choose to use a HECM for Purchase when you rightsize, you can eliminate all monthly mortgage expenses except the tax, insurance and HOA payments. Homeowners who rightsize can often generate enough money from the sale of their property to easily pay the larger down payment required for a HECM for Purchase transaction as well as for the ancillary costs of moving.
If you plan to rightsize your existing property, then a reverse mortgage for purchase program can allow you to leverage the money you will get from your old property as a way of ensuring you will not have to make monthly mortgage payments in your new home.
As you probably know, when it comes to your retirement goals and choosing the best road for you, there are many considerations. Your PERL lending officer is here to help. Call us today to discuss all your options.