Betty and John, are in their mid-seventies and are currently weighing the advantages and disadvantages of a reverse mortgage as a way of freeing up some cash. The couple purchased their home 45 years ago for about $14,000. Since then home values have skyrocketed and recent single family homes in their neighborhood have been selling for a minimum of $160,000.
Like Betty and John, if you’re considering a reverse mortgage it’s important to do some research prior to making a decision. You not only need to understand the basic principles of this kind of mortgage but you also need to look at all the advantages and disadvantages of a reverse mortgage.
Essentially a reverse mortgage is a loan that permits a homeowner, 62 years of age and older, to borrow against the equity in their home without having to sell it. Further, you don’t have to give up the title or take on a new monthly mortgage payment.
A reverse mortgage loan is tax-free and needs only to be repaid when the borrower (or in the case of Betty and John, when the surviving spouse) dies or sells the home. At which time, the reverse mortgage loan must be repaid in full, including all interest and other charges.
When examining the advantages and disadvantages of a reverse mortgage it’s important to consider both the process and the related costs of obtaining a reverse mortgage. Unlike a conventional mortgage, with a reverse mortgage, the homeowner (the potential borrower) must meet with a reverse mortgage counselor. References for counselors can be obtained from banks offering reverse mortgages or the U.S. Department of Housing and Urban Development (HUD).
The purpose of these meetings, which may take place in person or on the telephone, is for the homeowner to learn about reverse mortgages and discuss alternative options. It also helps you decide which kind of reverse mortgage may be best. As well as exploring the advantages and disadvantages of a reverse mortgage, it’s wise for the potential borrower to also compare costs between various lenders and request a Total Annual Loan Cost estimate from each.
In addition to discussing the advantages and disadvantages of a reverse mortgage with a counselor, you also need to understand that there are certain costs involved in the reverse mortgage process. Costs may include application fees, closing costs, insurance, appraisal fees, credit report fees, and quite possibly a monthly service fee. Remember too, that since a reverse mortgage allows you to continue living in your home, you’re still responsible for property taxes, insurance and repairs. If these payments are not maintained the loan could become due in full.
A reverse mortgage may also affect eligibility for federal or state assistance as well as Medicaid. That said, any reverse mortgage money that is received is tax-free and does not affect Social Security or Medicare benefits.
The condition of your home is also a large part of the approval process. It must be structurally sound and in good repair. If it’s determined that home repairs need to be done, the costs can be financed through the reverse mortgage loan.
The total amount a homeowner can borrow all depends on the kind of reverse mortgage selected, how much equity is in the home, the loan’s interest rate and, most importantly, the age of the borrower. Typically the older a person is, the more they can expect to receive.
A borrower can receive reverse mortgage payments in one of the following ways: in a lump-sum payment; fixed monthly payments; a line of credit, or a combination of any of the above. Most homeowners go for the line of credit option which allows them to draw on the loan whenever money is required.