As more and more baby boomers move into retirement age, the reverse mortgage is becoming more and more attractive as an additional income source to maintain a high standard of living. As with so many things in life, whether these loans are good or bad depends on individual circumstances. Nevertheless, reverse mortgages should generally be a last resort rather than a way to generate money that seniors really don't need.
The first thing to consider is that while reverse mortgages have some things in common with traditional mortgages these loans also have major differences. The two most significant differences being the very high origination fees and the possibility of losing ownership of the senior's highest valued asset. Under certain circumstances, the origination fees can be as high as $30,000 to $40,000 dollars. Of course, these can be wrapped into the loan but this immediately lowers the owner's equity by that amount.
The fact is, the most in need are the least likely to qualify for a reverse mortgage. It's the old adage that those with the least need to borrow money are the most likely to qualify. Today, almost all reverse mortgages are Home Equity Conversion Loans (HECL) and are insured by the FHA. Home value limits qualifying for these loans vary by county but the upper limit is $625,500.
Borrowers remain liable to pay all taxes, insurance, and to maintain the property in good repair. The lender will do a financial assessment of the borrower to assure they are financially capable of meeting these requirements. If there is any doubt, a portion of the loan will be required to be kept in escrow to meet future requirements.
You must be 62 years old and either own your home out right or have a very small balance on the mortgage. If you do have a small mortgage, a portion of the loan will be used to pay it off. How large of a loan you qualify for varies depending on the value of your home, your age, and the current interest rates.
Generally, you can take the loan out as a lump sum, as monthly checks payable to you, as a line of credit, or a combination of these options. If you take out more than 60% of the loan value in the first year, you have to pay an additional 2.5% upfront insurance premium fee. A 70 year old with a fully paid off house valued at $300,000 would probably be loaned $170,000 that would accrue interest at a fixed rate until it is repaid.
The loan becomes due in full as soon as you move out for more than a year, die, or sell the home. The house can also be forced into a sale if you allow it to fall into disrepair and don't have funds in escrow to bring it back up to standard. One major risk here is that if you become injured or ill and require a year recovery in a nursing home, your house will be sold to repay the loan. However, if you have a spouse still living in the house during this time, the sales clause can't be triggered.
Reverse mortgages aren't for everyone that qualify and can be complicated to fully understand. For that reason, HUD requires that all applicants go through approved third party financial counseling before the loan will be approved. A few approved agencies have grant money to offer this counseling free but most charge between $125 and $250.
For some, the reverse mortgage is a good opportunity to maintain an existing lifestyle. But these are very expensive loans with a lot of strings attached. In general, these loans are not too good to be true.
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Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.