Are Reverse Mortgages Too Risky
The Risks and Rewards of Reverse Mortgages
Retirees need sufficient income to get them through their golden years. If your home is your largest asset, though, what do you do?
The FHA started the reverse mortgage program for seniors just like you. Unlike a traditional mortgage with required monthly payments, the reverse mortgage pays homeowners age 62 and older some of their home’s equity. You may choose from a lump sum payment, monthly payments, a line of credit, or a combination.
In the last few years, the media ran wild with horror stories of scam artists taking advantage of seniors with reverse mortgages, but they’ve come a long way. Today, the reverse mortgage program offers seniors access to their funds without selling their home.
Like any other mortgage or loan, the reverse mortgage has its risks and rewards. Check them out below.
The Risks of the Reverse Mortgage Program
Let’s talk about the risks first. This is an area most people worry about the most. Like any finance program, the reverse mortgage program has risks, but not as many as you may think.
- Reverse mortgages cost money upfront.
Just like a standard loan, you’ll pay closing costs that may include the origination fee, appraisal fee, credit report fee, title fees, and the upfront mortgage insurance fee. You can pay the fees in cash at the closing. But, if you don’t have the cash, the lender can take the fees from the loan’s proceeds. This sounds good, but you’ll immediately owe interest on the money borrowed. This happens before you earn any of your own income.
- Interest accrues and compounds for the life of the loan.
You don’t pay interest out of your own pocket while you’re in the home. But any money you withdraw from your home accrues interest. The interest also compounds until you sell the home or pay the loan off in full. This increases how much you’ll owe when you or your heirs sell the house.
- You must live in the home as your primary residence or you trigger maturity.
The reverse mortgage program requires you or your spouse to live in the home full-time. If you don’t live in the home full-time or you vacate it for 12 months or longer, the loan becomes due immediately. This is also the case when the last living spouse passes away. Your heirs must pay the loan off in full within the specified period (usually 6 months).
- You may risk your government-aid programs like Medicaid or Supplemental Social Security Income.
If you receive any financial government aid, you must talk with your benefits specialist. Receiving income from your home may disqualify you from certain programs. Discuss the income (amount and frequency) with your specialist first.
- You must keep up with your home’s maintenance, real estate taxes, and homeowners’ insurance or risk the lender calling the loan.
Lenders must verify you can afford the home’s upkeep, taxes, and insurance. If you fall behind, the lender may call the loan due. You may use the funds from reverse mortgages, but that takes away from the money you have to live off of, which is the point of the mortgage.
The Rewards of the Reverse Mortgage Program
Knowing the ‘downside’ to reverse mortgages keeps you informed, but there are plenty of rewards too.
- The reverse mortgage allows seniors age 62 and older to stay in their home and earn income.
If your retirement funds run short, you may use your home’s equity to your benefit. Rather than letting it sit until you move or die, you can use the earnings you worked so hard for all of these years to age-in-place.
- You don’t have to make any payments.
You may pay interest payments if you want or you can leave it all to the end when you sell the home (or pass away). This gives you flexibility, unlike a traditional mortgage that would go into foreclosure if you don’t make payments.
- The reverse mortgage is a non-recourse loan.
Unlike a traditional loan, if your home is worth less than you owe on the mortgage, you don’t have to make up the difference. This applies to you or even your heirs if they sell your house after you pass away.
- The loan proceeds aren’t taxable income.
Unlike most other income, proceeds from reverse mortgages aren’t taxable. The IRS considers it like loan proceeds you’d receive if you took out a home equity loan. You don’t pay taxes on those funds either. This helps keep your tax liability down.
- The reverse mortgage may be a stream of income for many years.
Depending on how you take the funds, you may have an income stream for many years. You don’t have to worry about moving or finding a new place to live. Your money works for you for a change.
- You may use the funds how you want.
The FHA or lender doesn’t dictate how you may use the funds. As long as you meet the residency requirements and you keep up with the home’s needs, the funds are yours to use as you want.
- Lenders base your loan amount on your age.
How much you get from a reverse mortgage depends on the age of the youngest spouse, if you’re married. The older the youngest spouse is, the more money you can take out at once. The FHA bases your loan amount on your life expectancy compared to your current age. The longer you’ll live (the younger you are), the less you can take out at once.
[wpdiscuz-feedback id=”qijk33l0ob” question=”What do you think? Do you know anyone who has a reverse mortgage?” opened=”1″]Reverse mortgages can be a good financial tool when used right. Understanding the pros and cons and how they apply to your life is important[/wpdiscuz-feedback]. Look at the big picture and think about how long you plan to stay in the home. If it’s not for the rest of your life, looking at other options may be better. If you want to stay in the home as long as you can, though, the reverse mortgage program may make it possible.
An accountant and tax preparer by profession, Gust’s true passion lies in his company blog titled “HBS Financial Group, Ltd.”. Through this venue, he not only tries to teach individuals about budgeting, money management, and taxation but he writes the majority of the articles as well.