Reverse Mortgage Information: What You Need to About the Good, the Bad, & the Ugly Side of Reverse Mortgages
 |
If you or somebody you love is over the age of 62, this may be the most important article you ever read. The topic of discussion is reverse mortgages. More specifically, we'll discuss what reverse mortgages are, who qualifies for one, and what the benefits (and disadvantages) of using them are.
Let's start from the top:
What is a reverse mortgage?
As the name suggests, a reverse mortgage allows a qualified senior citizen to draw the equity out of their home... essentially reversing the mortgage process. Instead of paying the bank, a mortgage holder is paid by the bank either in a lump sum or installments.
This loan against the property doesn't have to be paid until the homeowner passes away.
Who can qualify for a reverse mortgage?
To qualify, you have to be over the age of 62. You must also own a qualifying home, as determined by the lender and your area. Also, if there are any liens against the property they must be paid off with the reverse mortgage (the lender must be in first position).
Prior to qualifying for the loan, you have to participate in financial consultation by a HUD approved consultation service. This is to benefit the borrower as opposed to the bank; the goal being to ascertain that the borrower fully understands the implications of a reverse mortgage.
What are the pros of getting a reverse mortgage?
- The borrower can use the loan's proceeds in any way they see fit.
- No payments have to be made during the course of the loan.
- Mortgage proceeds aren't taxable and don't affect Social Security or Medicare benefits*.
- Easy way to access a property's equity without having to sell it.
What are the cons of getting a reverse mortgage?
- Since no payments are made during the life of the loan, the interest of the loan is added to the principle every month.
- This can lead to a large balance when it comes time to pay the loan off.
- One of the most expensive mortgages to attain, in terms of fees and origination fees.
- Interest rates are generally high, eating into the equity that is passed down to heirs.
- The closing costs on a reverse mortgage can't be financed with the loan. Borrowers have to pay the fees out of pocket.
- Complicated. Many borrowers don't fully understand what they're getting into.
In conclusion:
We'll bring this discussion on reverse mortgages to a close with an answer to a common question: who is responsible for paying the debt once the borrower passes away.
Upon the passing of the borrower, the property will move through the traditional estate process. From the date of the borrower's passing, the heirs have a year to pay off the balance. This can be accomplished by either refinancing the property or selling it outright.
As mentioned under the "cons" subhead above, reverse mortgages can be complicated. For those considering taking out such a loan, I would suggest seeking out the professional guidance at your local HUD office.
* The American Bar Association (ABA) has claimed that advances from a reverse mortgage may be considered liquid assets if left in a bank account longer than a year after receiving it. This bump in liquid assets may disqualify some for certain social programs. Consult a professional for more information on this.