As you go about your everyday retirement life, you may be on the lookout for tools that help your world run more smoothly.
For example, when preparing home-cooked meals for your grandchildren, you may consider non-stick pans that make for easy cleaning afterwards. Or, when putting up picture frames, you might want a sturdy ladder and a strong drill. For maintaining your yard and garden, you may look for a hose nozzle that offers you multiple spray options.
So when it comes to searching out the best way to access your home equity, why should it be any different? Like other situations in life, you want to find the most efficient tool that can help you complete a goal in retirement: to utilize the money sitting in your home in various ways, like supplementing social security income or increasing your cash flow.
Getting to Know the Reverse Mortgage
One such tool you can leverage to achieve your retirement goals is a reverse mortgage. This unique mortgage loan helps senior homeowners ages 62 years and older access a portion of their home equity.
Reverse mortgages have emerged as a popular choice since its inception in the early 1960s, largely due to the unique features it offers, especially for borrowers on a fixed retirement income. With a reverse mortgage loan, repayment is deferred; meanwhile you may age in place, retain home ownership, and take advantage of federal insurance. However, it is important to understand the advantages and disadvantages when considering any financial product. Educating yourself on the details of reverse mortgage loans, and their pros and cons is the first step to determining if this loan is a good fit for your needs.
The Pros and Cons of a Reverse Mortgage
The following are main features of a reverse mortgage, and the pros and cons of each.
1. You remain the owner of your home.
PRO
Even when you close a reverse mortgage loan, home ownership still stays with you. As long as you comply with all loan terms as agreed upon, the home title does not change hands to the lender. This is comforting for seniors who are worried that taking on a reverse mortgage may affect their ownership. The good news is that you still have the freedom to do everything you have always done as the owner of your home as long as you fulfill your loan obligations.
CON
With ownership of the home comes the typical financial obligations associated with any loan, which do not end when signing on to a reverse mortgage. As the homeowner, you are still responsible for continuing to pay property taxes and homeowners insurance, and maintaining basic repairs on your home to retain its value.
IS IT RIGHT FOR ME?
If for any reason you feel that you may have difficulty fulfilling the obligation to continue paying your property taxes, homeowners insurance, homeowner's association fees, and basic home maintenance, then a reverse mortgage may not be right for you. Defaulting on these terms will render the loan due and payable. However, if you are confident you can afford these financial obligations, you should have no problems getting the most out of a reverse mortgage loan.
2. You age in place.
PRO
For senior homeowners who love their home and want to remain in the comfort of their familiar surroundings as they age, a reverse mortgage offers this huge benefit. Reverse mortgage loans allow you to continue living in your home while still accessing its equity. Prior to the establishment of reverse mortgages, many homeowners would have to sell their homes in order to receive their home equity as cash. The only option other than that was to assume a second mortgage, which meant having to pay a monthly mortgage payment. But, with a reverse mortgage, a senior borrower may age in place, access home equity, and avoid monthly mortgage payments altogether.
CON
However, because this loan was designed with the purpose of helping seniors age at home, one stipulation is that borrowers must live in their home as their primary residence. Leaving the home for more than 12 consecutive months will cause your reverse mortgage to become due and payable. In addition, only principal residences are eligible for the loan. No vacation homes or secondary homes will qualify.
IS IT RIGHT FOR ME?
If you foresee the possibility that you may need to move into a nursing home or a family member's home, or you desire to travel away from your home for more than 12 consecutive months, then the requirement to age in place may feel limiting. However, if you desire to age in the comfort of your home and live there as your primary residence, then this loan may be designed for you.
3. Your repayment is deferred.
PRO
One unique feature of the reverse mortgage loan is that repayment is deferred until you permanently leave the home, sell the home, or pass away. Until then, you are not required to pay a monthly mortgage payment, although you certainly may repay any portion of the loan at any time without penalty, if you so choose. This feature is useful for many senior homeowners who do not want another monthly payment to worry about and can utilize the funds that would normally be allocated to a mortgage payment towards other uses.
CON
Because payment is deferred until you permanently leave the home, a lien stays on your home until your loan is repaid.
IS IT RIGHT FOR ME?
After reverse mortgage borrowers permanently leave the home, the loan is generally repaid by the proceeds from the sale of the home or by refinancing. So if you have heirs who want to keep the home instead of selling it, they may have to refinance the reverse mortgage loan into a traditional mortgage in order to repay the loan. This may not be the ideal option if you want to leave the home to heirs without needing to repay a loan. However, if your main target is to remain in your home while accessing equity, all without the requirement of a monthly mortgage payment, you may have found your loan solution.
4. Your loan is Federally-insured.
PRO
The Home Equity Conversion Mortgage (HECM) reverse mortgage loan is the most common type of reverse mortgage, and is fully insured by the Federal Housing Administration (FHA). This translates to added protection for senior consumers in multiple ways. You are safe from ever owing more than the value of your home when it is sold. Also, if your loan balance ever exceeds the value of your home, federal insurance will cover the difference between the two amounts.
CON
Just like all insurance, the government insurance that comes with a HECM reverse mortgage charges a monthly insurance premium. Though this charge is included into the loan so there is no out-of-pocket expense, this does add to the overall cost of the loan.
In addition, this loan is strictly regulated by the FHA in order to ensure the highest level of consumer protection for senior homeowners. This regulation translates into new rules like Financial Assessment, which requires that borrowers will have their credit history and income verified to ensure that instances of default are decreased. If deemed necessary, it is possible for borrowers to be required to set aside a portion of loan proceeds to ensure payment of home costs like homeowners insurance and property taxes.
IS IT RIGHT FOR ME?
If you have had credit trouble in the past or if you do not have a steady income, you may need to participate in the mandatory set-aside in order to get the HECM loan. If you oppose this mandate, then you may not find this loan attractive. However, if you feel that federal insurance offers more value than drawbacks, such as the fact that you are protected from owing more than your home's value, and you appreciate that the reverse mortgage set-asides are for your benefit, then the federally-insured HECM reverse mortgage may be just the loan for you.
As you consider whether a reverse mortgage is right for you, it’s important to understand that each feature of this unique loan offers its share of pros and cons to a borrower, depending on their circumstances. To determine if a reverse mortgage may be beneficial to you, it is helpful to ask yourself how each feature affects your particular situation. Continue to educate yourself on the details of the loan, and speak with a reverse mortgage professional from a reputable industry lender to answer your questions and help you decide if this loan can help you fulfill your retirement goals. If the reverse mortgage loan does indeed turn out to be the right option for you in retirement, then you will have succeeded once again in finding the best tool to make your life run smoothly.
Sources:
Lim, Alberta. "The Pros and Cons of a Reverse Mortgage." Equities.com. 21 July 2015. NP. Web. 23 July 2015. http://www.equities.com/editors-desk/personal-finance/real-estate/the-pros-and-cons-of-a-reverse-mortgage
Lim, Alberta. "What Seniors Should Know About Reverse Mortgages." GriswoldHomeCare.com. 23 July 2015. Griswold Home Care. Web. 23 July 2015. http://www.griswoldhomecare.com/blog/what-seniors-should-know-about-reverse-mortgages/
Lim, Alberta. "Debunking Myths about Reverse Mortgages." Equities.com. 18 June 2015. NP. Web. 23 July 2015. http://www.equities.com/editors-desk/personal-finance/real-estate/debunking-myths-about-reverse-mortgages
Understanding the Pros and Cons of a Reverse Mortgage." AAG.com. American Advisors Group. ND. Web. 25 June 2015. https://www.aag.com/news/the-pros-and-cons-reverse-mortgages
"What is a Reverse Mortgage?" InsideElderCare.com. 2 July 2015. Inside Elder Care. NP. Web. 14 July 2015. http://www.insideeldercare.com/legal-financial/what-is-a-reverse-mortgage/
About American Advisors Group
American Advisors Group, the nation’s leader in reverse mortgage lending, is dedicated to helping American seniors convert a portion of their home equity, a largely untapped asset, to help fund their retirement needs. To learn if a reverse mortgage can work for you, visit https://www.aag.com/reverse-mortgage-calculator/ to use the AAG reverse mortgage calculator.
American Advisors Group is proud of its A+ rating by the Better Business Bureau, and 97% customer satisfaction rating, and is a proud member of the National Reverse Mortgage Lenders Association (NRMLA). To learn more about reverse mortgages and American Advisors Group, please visit www.aag.com.
About The Author
As a writer for American Advisors Group, the leading U.S. reverse mortgage lender, Alberta Lim is committed to sharing news and information seniors can use to improve their quality of life.