Everything You Need To Know About Reverse Mortgages

A reverse mortgage is a financial product that older homeowners can take advantage of. The main criteria for taking out a reverse mortgage are that you must be at least 62 years old and own at least 50% of the equity in the home, explains Investopedia. Reverse mortgages provide funds to homeowners in exchange for deferred repayments that won't take effect until the homeowner leaves the property. Supplementing a retirement income such as Social Security checks, pension, or personal retirement savings with capital equity from your home can make for a much more fulfilling life in retirement, but this financial option isn't ideal for everyone.

A reverse mortgage is a great idea for a homeowner with significant equity in their property and who intend to remain in their home for many years to come. This provides the best cash consideration in taking out the loan by using the home as collateral. Conversely, homeowners who are in poor health or those considering downsizing their property aren't great candidates for a reverse mortgage product. If you are currently considering a reverse mortgage, there are several other factors that need to be taken into account.

Reverse mortgages don't require monthly payments

Unlike a credit card or a traditional mortgage, repayment of a reverse mortgage is only done once the owner either sells the home, moves out, or passes away. As a result, reverse mortgages can feel more like a retirement investment product than a loan. While this can be a positive aspect, it also means that you'll need to keep careful track of spending and utilization. Without a monthly payment to contend with, it can be incredibly easy to overspend rather than make use of the financial product as a budgeting tool.

Bankrate also notes that a reverse mortgage adds interest into the equation, just like a traditional borrowing arrangement. However, because you are drawing from an available pool of funds rather than utilizing the entirety of a loan balance upfront (as would be the case with a personal loan or traditional mortgage), the actual weight of any added interest is significantly reduced.

Reverse mortgages provide additional cash

One thing that many retirees face upon leaving the workplace is a sudden change in their incoming funds. At retirement age, many homeowners have typically finished paying off their traditional mortgage loan, and monthly food expenses and other living costs may be reduced. Yet, many people still face an uphill battle to make their finances work for them, especially if they are differing the withdrawal of Social Security benefits to gain a better monthly payout in the next few years, notes the U.S. Social Security Administration.

Reverse mortgages can provide a relatively cheap line of credit as a cash flow supplement. Typically, the equity in your home stays locked into the asset unless you choose to sell it or purchase a new, less expensive alternative. Thus translating some of the value into usable cash. However, with a reverse mortgage, you are able to borrow against the value of your property and not worry about repayments in the short term.

Reverse mortgages for home sellers

Reverse mortgages are not a good idea for homeowners who are likely to move in the near future, notes Investopedia. You will not be responsible to repay the loan for as long as you remain in the home — although you do have the option to make payments in the balance. In consideration of the upfront costs of a reverse mortgage, this financial product only makes sense for those who are planning to stay in their current residence.

Bankrate reports that other considerations can play a role in this decision as well. It's important to note that if you leave the home to move into a full-time medical care facility then you may also be required to repay the balance. Additionally, if an adult child comes to live with you, or you get married after taking out a reverse mortgage, it's important to understand that changes in your life can affect other family members' ability to remain in the home or maintain ownership of the property. Generally speaking, the best candidates for reverse mortgages are homeowners with a good amount of equity and those entering their retirement period in good health.

Reverse mortgages increase risk

Any instance of borrowing against collateral places the asset into an increased position of risk. While a reverse mortgage isn't the riskiest option out there, it still can create a burden on your overall financial wellbeing, and in turn, jeopardize your status as a homeowner. Investopedia reports a number of costs associated with a new reverse mortgage loan, including an origination fee of up to $6,000, and upfront mortgage insurance premiums that can be as much as 3% of the loan. This comes on top of an ongoing 0.5% premium each year, warns Bankrate.

In order to maintain a reverse mortgage, you must stay current with property taxes, homeowners' insurance, and other financial requirements of typical home ownership. In addition, your local tax authority has a claim on the home in the event of tax debt. Therefore, staying current with your financial obligations, as well as keeping up with essential home maintenance, is essential to remaining in good standing with the lender.

Do reverse mortgages affect inheritance?

Bankrate reports that homeowners have a few options regarding their heirs when utilizing a reverse mortgage. Heirs are able to settle the reverse mortgage in a number of ways: They can forfeit the title to the lender if the balance exceeds the property value, they can sell the property and keep the balance after paying off the debt, or they can refinance the property and keep the home.

Because a reverse mortgage is a non-recourse loan, the debt burden won't transfer to an estate or surviving heirs, explains Investopedia. Likewise, Bankrate also notes that reverse mortgages are FHA secured, meaning lenders are prohibited from acting in a predatory manner against heirs or spouses working to settle an estate after a borrower's death. Instead, if an heir chooses to forfeit the title to the bank, a lender can simply file a claim with the Federal Housing Administration for the unpaid balance.