Are you over 62 years old—a Baby Boomer? You may be thinking about a Reverse Mortgage. If so, there are 5 things you need to know before you decide.
Basically, a reverse mortgage allows a homeowner to access the equity in their property and receive monthly payments from the bank against the value of the home. It’s a way of converting the equity in your home for cash, without selling it outright. The loan is repaid when the borrower dies or is no longer able to live in their home for a period of a year.
This might sound appealing on the surface, especially if you’re a homeowner who has owned your home for a long time and have accumulated a high percentage of equity. However, it’s important to know that these types of loan products have led to significant financial issues for those who’ve opted for them, including foreclosure.
There are several factors to consider when examining if a reverse mortgage is right for you. First of all, if you think you’ll be saving money, know that reverse mortgage fees are much higher than conventional mortgage fees. Most borrowers aren’t aware of the actual cost of the loan because all of the fees are rolled into the loan amount.
There are always costs associated with obtaining a loan. Those costs vary. However, the fees associated with reverse mortgages can be as high as $35,000-40,000! Right from the beginning, you could be accruing interest on a substantial loan amount before receiving your first payment from the bank.
The bank will generally lend up to 75 – 80% of the home’s appraised value, so you don’t get 100% of your home’s value.
Impact on Benefits
In certain cases, the borrower’s eligibility for government-backed programs such as Medicaid or SSI may be impacted by a reverse mortgage. Talk to your benefits counselor or attorney to explore this possibility. Also, when the borrower dies or is no longer able to live in the home, the loan then becomes due to the bank. This may not seem like an important consideration now, but if the borrower ever needed to enter a nursing home or full-time care facility, the loan would become due, thus making health factors a real risk when considering this option.
Outliving the Equity
You might outlive the equity in your home. What this means is you’ve borrowed the maximum loan amount on your home. Keep in mind, your property taxes, insurance, maintenance and repairs are still a monthly cost you are responsible for. If you cannot afford to pay these expenses, the bank will foreclose. Where will you go?
You may have heard a reverse mortgage is better than selling your home outright because you’ll receive monthly payments and be able to continue to live in your home. However, a homeowner is almost always better to sell the property outright, or to explore other financing options, than to take on a reverse mortgage. In a relatively short period of time, selling to a real estate investor will give you a lump sum to invest in a more manageable home.
Don’t wait until you feel desperate to make decisions. Learn all you can so you’ll be protected and be able to take advantage of the best opportunities available BEFORE you need them.