Reverse mortgages for seniors are becoming quite popular in recent years and for good reasons. Retirement can be a difficult challenge for most people. Not only are you finding that your income suddenly becomes restricted, but you may find that the amount of money that you take in is far more difficult to live on. While there are pensions, 401(k) s and even Social Security you can count on, you may end up finding that these items do not deliver the funding you need to survive.
But before you settle in and just accept it for what it is, you might want to consider an option that is available through the Federal Housing Administration in the U.S. Department of Housing and Urban Development. The program that you can participate in is called Home Equity Conversion Mortgage (HECM) and is often referred to as a reverse mortgage. For seniors that are hard pressed for money, this can be an excellent way to get the funds that you need.
What Are Reverse Mortgages
Reverse mortgages are designed specifically for seniors aged 62 or older. When you take on a reverse mortgage loan, you will receive cash for the equity in your home. You do not have to pay back the loan until you leave, sell your home, or if you should die.
So why the term “reverse?”
In a traditional mortgage loan, you are required to make monthly payments which reduce the loan balance gradually. In a reverse mortgage, no payment is made and the accrued interests are added to the loan. This means the amount you owe grows over time.
Why Reverse Mortgages May Make Sense for Seniors?
Many seniors have paid off their mortgage and own their home free and clear, or owe very little on their mortgage. They can’t just go out and get traditional home equity loans because the first thing a lender would look at, is how they will be repaying the loan. Since they are most likely retired or on fixed income, they would not meet the criteria to be approved.
All that home equity they are sitting on does them no good, because, as they say – you can’t eat equity.
Since most seniors find that their home when they reach 62 tends to be the one they remain in for the remainder of their life, reverse mortgages can be an excellent opportunity for them to get the additional funds that they need.
Of course, you do need to understand that there are some restrictions on this loan.
Reverse Mortgage Requirements
Here are the requirements for reverse mortgages:
- You must be 62 or older.
- The home you are taking the reverse mortgage on must be your current residence.
- Your standard mortgage must have be paid off or you should have a balance that your equity will pay off the remaining balance.
- you must be able to maintain your home, no matter what circumstances arise. This includes paying your insurance, taxes, utilities and other expenses that may come up.
How Reverse Mortgages Are Re-paid?
Once you have passed on and assuming that you remained in your home until death, your heirs will have a couple of options available to them:
- The first will be the option of repaying the loan and keeping the home.
- The other choice is allowing the home to be sold and in turn receiving any funds that are obtained above the loan value in the home.
What if the home value is less then the loan balance?
As mentioned above, the loan balance grows every month in reverse mortgages, so it is possible that it actually exceeds the fair market value of the home. Also, in a economic downturn like we are experiencing for the past few years, most homes lost their value.
Fortunately, if this happens, the FHA will cover the loss and pay the difference to the reverse mortgage lender.
You may use the cash that you obtain from your reverse mortgage in this process and the title remains yours as well. This can be a beneficial process, since most people become concerned when they take out the loan.
Since nothing needs to be paid back, you will have more disposable income than you may have had previously to help you get the things you need and with no restrictions on how it will be spent, you will be in excellent shape.
Disadvantages of Reverse Mortgages for Seniors
You do need to keep in mind that there are some drawbacks to this process. The first is the fact that reverse mortgages are expensive. The start-up costs include mortgage insurance premiums, loan origination fees, and closing costs. These could run you up to 10% of the value of your home.
Also, since you will be charged monthly on your home on a monthly basis, you could end up with no equity left in your home and that can result in your estate not having the home you had once hoped to provide for them.
The money you receive from reverse mortgages may affect your eligibility for some government assistance programs such as food stamps, Supplemental Social Security Income, or Medicaid. You should check with the benefit providers first prior to applying for a reverse mortgage loan.
Before you set out to take this loan, it is important that you take the time to consult with a financial advisor to go over the entire process. Since every individual has a different set of concerns, these individuals will help you to understand what you are doing with your funding and they will allow you to avoid having any potential problems with the process as well.
Remember that a reverse mortgage is a serious financial decision that you are going to make. While it can give you additional income, it will be vital that you take the time to understand how this process works and to determine if it will benefit you in the current situation that you are in.