We have all seen the commercials for reverse mortgages, promising quick, easy money to help supplement income and enjoy retirement. However, just like any other financial transaction, a reverse mortgage can carry risk, and it is important to understand exactly what is involved before you sign on the dotted line.
So what exactly is a reverse mortgage? Basically, it is a payment that a homeowner receives from the holder of a mortgage. You must be 62 years or older to take out a reverse mortgage, and the amount that you can borrow depends on your age, interest rate, and the value of your home. Payments can be made in monthly or yearly installments, or in a lump sum. The amount of money received is tied directly to the equity that a homeowner has in his or her home. Generally, you do not have to pay back the money as long as you live in your home. However, when you die, sell your home, or move out, you, your spouse, or your estate must repay the loan. Sometimes, that means selling the house to repay the loan.
There are a number of important things to consider before taking the plunge into a reverse mortgage. First, the fees and costs associated with a reverse mortgage can be substantial. There are the fees that one would incur with a regular mortgage, such as an appraisal, title search, and an inspection. However, lenders may also charge an origination fee based on the value of your house, although the Department of Housing and Urban Development’s Home Equity Conversion Mortgage program – the program used by most reverse mortgage lenders – caps this fee at $6,000.00. Lenders may also charge up to $35.00 per month to service the loan. Of course, these fees are in addition to the mortgage interest rate. The upfront fees can easily total 3% or more of the value of your house.
Another consideration is whether you can afford to maintain your home. Although you don’t have to repay the loan as long as you remain in the home, the borrower must stay current with homeowners insurance and property taxes, and must keep the property in good repair. If you fail to do so, you loan could go into default and the lender could demand payment.
A borrower must also understand that if you can no longer live in the home, the mortgage becomes due. You may not only be faced with the responsibility of paying off the loan, but may also have to deal with the cost of assisted living or nursing home care, and the funds received from a reverse mortgage can complicate this process. If the borrower has someone else living in the home, such as a friend or a child, they may also lose the right to live in the home.
There are many people who have taken out reverse mortgages and have enjoyed the financial freedom that these mortgages can bring. However, if you or a loved one is considering a reverse mortgage, it is important to carefully review the available options and the terms of the loan. There is no such thing as free money, and the loan will have to be paid back at some point. Make sure that you have considered all of your options, and know your rights and responsibilities!