Reverse Mortgage Eligibility

  • All reverse mortgage borrowers must be 62 and older
  • Must own property and occupy as primary residence
  • Participate in an information counseling session
  • Must have sufficient equity in the property
  • Property must meet FHA property standards
  • Must maintain home with needed repairs, property taxes and insurance

Loan Amount Based On

  • Age of youngest borrower
  • Current interest rate
  • Lesser of appraised value or the FHA insurance limit
  • An Image Slideshow - Reverse Mortgage Educator
  • An Image Slideshow - Reverse Mortgage Educator
  • An Image Slideshow - Reverse Mortgage Educator

Reverse Mortgage Pros and Cons

A reverse mortgage is a financial tool, and like any other financial tool, it is wise to consider any reverse mortgage pros and cons. This is especially the case because a reverse mortgage is unlike the regular mortgages most of us are used to. A standard "forward" mortgage requires monthly payments to the lender, and at the end of the term the entire loan, both principal and interest, has been paid down to zero. A reverse mortgage starts with the lender paying the borrower money, and at the end of the term (the life span of the borrower, as long as they remain in the home and other requirements are met) the balance has grown, not gone to zero. So what are the reverse mortgage pros and cons?

 

Pros of Reverse Mortgages

1.  A reverse mortgage can allow you to obtain funds to spend on things that you want or need, such as a vacation, medical bills or home repairs, without having to make payments on those funds.
2. You can use a reverse mortgage to pay off your current mortgage and thus eliminate your current mortgage payments, making your monthly cash flow easier.
3. A reverse mortgage can help you stay in your own home longer, by giving you the funds to pay for in-home care or medications.
4. Unlike a line of credit or any other kind of loan, you do not have to make payments on the loan until the entire amount becomes due and payable.
5. Unlike a line of credit or any other kind of loan, you do not have to conform to the usual qualification standards of income and credit.
6. If, at the end of the loan your balance exceeds your home value, your estate can sell the home for whatever the market value is, and the FHA insurance covers the rest. It's a "non-recourse" loan, which means the lender cannot sue the borrower for money if the value of the real property falls below the amount required to pay off the loan.
7. You can use a reverse mortgage to protect your other retirement assets.  Instead of drawing on other investments, you can use the proceeds of the reverse mortgage to cover various expenses, or to eliminate your mortgage expense.
8. You can use a reverse mortgage as extra security against possible future needs, even if you have plenty of assets now, without having to alter your lifestyle or budget.
9. A reverse mortgage can help you provide assistance to children or grandchildren, or contribute to favorite charities, and see the results, instead of letting the estate do those things after your passing, when you are not around to enjoy the effects.
10. You can use your own home equity to cover your needs, instead of depending on children or other relatives.
Cons of Reverse Mortgages

1. Perhaps the main negative to a reverse mortgage is that you are increasing your indebtedness rather than decreasing it.  If your children are depending on receiving every penny from your home value after you have passed away, then you would need to discuss a reverse mortgage with them to make sure they understand that it means they will receive less from your estate later.  If, however, a reverse mortgage means you will be less dependent upon them in the meantime, or that your life will be more fulfilling and less stressful in the meantime, most children are fine with it.
2. The second biggest concern for people is the cost of a reverse mortgage.  It is more costly than a regular forward loan primarily because of the required up front mortgage insurance, which is set at 2% of the value of the home, to a maximum home value of $625,500.  So if your home is worth $625,500 you would be looking at an up front mortgage insurance figure of $12,510.  In addition to this, there is an origination fee, which is regulated by HUD and can go to a maximum of $6000.  This is not necessarily a fee that goes to the loan officer who is obtaining the loan for you, but may go directly to the lender that funds the loan.  Then there are the costs that you would find with any forward loan, such as title insurance, appraisal, escrow, etc., and may add up to about $2500-$3000, more if it's a purchase.
HUD has introduced the HECM Saver program, which almost eliminates the up front insurance, and it's possible to get a HECM with no origination fee if you are willing to move to a higher interest rate, so there are ways to reduce the costs.
3. You need to be aware that certain things may trigger the reverse mortgage to be due and payable.  These things include selling the home, no longer living in the home as your primary residence (or being away from it for over a year at a time), and failing to pay your property taxes and homeowners insurance.
4. If one spouse is not old enough to qualify for a reverse mortgage, this could lead to serious issues.  This has been the scenario that has been at the root of most negative stories about reverse mortgages.  Let's say a couple wants to get a reverse mortgage, he is 67 and she is 59.  Because she is not yet 62, she cannot be on the loan or on title.  So they proceed, with just him on the loan.  The following year he passes away, and because she's not on the loan she's not protected and the loan becomes due and payable.  She does not have the income to qualify for a regular refinance, nor does she qualify for a reverse mortgage because she's still not old enough.  She has no option but to sell the home that she had planned to live in for the rest of her life, and make new living arrangements.

There are three solutions to the problem of a couple like this wanting to get a reverse mortgage.  The first is awareness of the issue.  Many spouses say they would not want to live in the home should the spouse on the loan pre-decease them, so the issue of selling and moving is really no issue at all, they would do that anyway.  They go into the loan knowing how things will proceed if the spouse on the loan should pass away, and there are no surprises.  The other solution is to get life insurance on the older spouse, such that there would be enough funds to cover the loan should they pass away.  This insurance might be expensive, but it's a viable solution.  The final fix is simply to wait until the younger spouse is old enough to also be on the loan.  This will only work if the need is not too pressing, and is also taking a chance that the reverse mortgage will still be available in the future.  It is subject to Congressional budget cuts like other programs and in any given year the benefits may be reduced and the entire program could end.  This wouldn't affect reverse mortgages already in place, but it would affect those who had planned to get one but had not yet done so.
 
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