My parents are in a reverse mortgage. Essentially, this mortgage is a loan against their home that they do not have to pay back, so long as they continue to live at that location. In short, a reverse mortgage is a loan that allows borrowers to have access to their home equity without selling their home. The loan is paid back from the proceeds of the estate when the borrower decides to sell the home and move, or passes away.
These days where cash is king, a reverse mortgage may sound too good to be true. My parents simply do not make a monthly mortgage payment, which is one of the several ways in which a borrower can get cash paid to them through a reverse mortgage (other ways include a single lump sum of cash, a credit line, or a combination of the two). But don’t jump too fast into a reverse mortgage. As with most loans these days, there are some stringent qualifications that need to be met, in addition to some draw backs that may affect the way you feel about this type of loan.
To be eligible for most reverse mortgages, a borrower must be 62 years or older, and own their own home. Additionally, your credit score and income are typically not used in the loan calculation…but your health, home value and home equity are taken into great consideration. One benefit to a reverse mortgage is that there are no monthly repayments that are necessary throughout the loan period. In fact, most reverse mortgages require no repayment so long as the borrower continues to live in the home.
In most loans available today, a borrower uses income to replay the debt of the loan, which, in turn, builds up the equity in the home. However, a reverse mortgage takes the equity out of the home, essentially increasing the debt, so the total balance owed increases. In better real estate markets, the increase in home values meant an increase in the equity available to the borrower. These days, though, with values on the decrease, most reverse mortgage borrowers continue to see an increase in the debt while their equity continues to fall. On the positive side, if the reverse mortgage balance is less than the value of the home at the point of repayment, your heirs get to keep whatever the difference may be. However, throughout the term of the loan equity reduces on a monthly basis, reducing what may have been left to the heirs of the estate upon the death of the borrower.
The benefits and drawback to a reverse mortgage are plain to see. The reverse mortgage loan provides a borrower with a source of tax-free income for the rest of their lives, assuming they will live in the home that long. However, a reverse mortgage can be initially expensive as well, with expensive fees, higher interest rates and closing costs typically more than your standard mortgage loan. Also, though the loan can be repaid without selling the home, your heirs will be required to pay off the balance plus interest when the loan term ends. Another consideration of the reverse mortgage is that though there is an initial three day right of rescission for this loan type, after that time period passes, the loan is final. Trying to refinance a reverse mortgage at a lower interest rate is difficult at best, and usually very costly.
For some, the reverse mortgage may be a good solution for those looking to cut the monthly outlay of cash while tapping into the equity of their home. Do your homework, though and ask lots of questions. Rates these days are the lowest in years and it may be more beneficial to take advantage of historic low interest rates over tapping the equity that you may have been saving for tomorrow.