search
an online resource for baby boomers

Reverse Mortgages:
Good or Bad?

Be careful when choosing your reverse mortgage company. Some companies still offer the reverse mortgage product that takes your home out of your name at closing. This eliminates your right to make payments, sell your home, or pay off the loan and keep your home. There is a much more protective reverse mortgage program called Home Equity Conversion Mortgage(aka HECM). This reverse mortgage program is insured by the Federal Housing Administration (FHA) and is structured similar to the traditional loans giving you the similar benefits of traditional loans with more flexibilties such as:

• Make monthly payments - You can make payments on the loan paying principle + interest + mortgage insurance to pay the loan off. You can also simply pay interest payments to keep the loan balance consistent as an interest only loan would do. You can also pay less than interest or no payments at all. Paying less than the interest, or no payments will increase the balance of the loan monthly. However, you will be able to follow it through your monthly statements.

• Pay the loan off - You can pay the loan off at any time with NO prepayment penalties

• Sell your home - You can sell the home at any time with NO prepayment penalties

• Live in the home with no payments - This is the most popular reason for getting a reverse mortgage. Interest and mortgage insurance is deferred until your heirs take over home and sell it or put the loan into thier name. This allows you to keep all of your income to build savings, use for expenses, maximize monthly cash flow or use for whatever your needs currently are.

Why Not Get a Reverse Mortgage?

Selling home soon?

As with any other mortgage, there are settlement charges. Settlement charges are costs to close your loan. Settlement charges are higher on reverse mortgages than most traditional loans. However,the benefits and flexibility of the loan often make up for the increase. Costs are a lot lower than in the past therefore your counselor or loan advisor will go over those with you. Reverse mortgages are meant to make it so the borrower will not need to refinance because they are in control of payment amounts therefore should not need to lower them. No payment is required and therefore should negate the need to refinance to lower a payment. Because you may be selling soon, you want to keep the mortgage balance low and therefore avoid the mortgage balance increasing because of the settlement charges with refinancing. However, if you want to not have to make mortgage payments while waiting on the buyer in this unstable real estate market, you may find getting the loan is still worth it.

Spouse under 62?

At this time only borrowers 62 or older can be on the title and mortgage. Therefore spouse under 62 must come off title. You can still give the property in your will or other legal ways. Discuss options with your attorney or estate planning professional. Life insurance can also become very useful in paying off the mortgage balance upon death resulting in a free and clear property to the spouse/beneficiary. Discuss this possibility with your life insurance provider.

No Equity

Reverse mortgages work best when your value of your home greatly exceeds the balance of the liens. If you do not have as much equity, you may still be approved. You can bring the shortgage to pay off the balance of the lien to closing. You will need to decide if bringing that shortage is worth not having a mortgage for the rest life of the borrower(s).

Why Consider a Reverse Mortgage

No Monthly Savings after paying bills- Reverse mortgages will often result in a better cash flow monthly due to the elimination of the mortgage payment without hurting credit or accumulating fees.

No or depleting savings, investment, or retirement- It is uncomfortable not having any long term stability or living check to check. If you qualify to get money back through your Reverse mortgage, putting this money in your savings or investment accounts can give the comfort of knowing you have access to needed funds at any time without borrowing.

Home Improvements/High Interest Credit- Get rid of High interest credit if you dont think you can pay it off in a timely manner yourself or if your payments are not on time and create negative reporting to the credit bureaus. The emotional satisfaction of home improvements is rewarding. If you dont have the money for improvements, instead of charging it to high interest credit cards, use your cash back to pay off the debt or improvement without creating a new monthly bill.

Long Term Stability

Reverse mortgages guarrantee your health, income, medical expenses, and economic instability will not ever take your home. Both spouses on the loan, will have the comfort of knowing their loved one will always have the home. The only things that call the loan due are unpaid property taxes, homeowners insurance, or abandoning the property by not having it as your primary residence for an extended time.

Financial Control

Because you can make payments on your home, as well as choose not to make payments, you have long term financial control that other loans do not offer.

Value Protection

Due to FHA's Mortgage Insurance requirement (only on the HECM loan), you are always protected by the balance of the loan never exceeding the value of the home. With traditional loans, you dont have this protection and therefore hear of people's homes being "under water". Under water means the value of the home is less than the balance of the liens on the home. Mortgage Insurance protects the senior from that scenario and therefore gives comfort in not making payments monthly payments and the chance of the home being a negative asset.

Cash back not taxed as income- Cash back is not considered income until the mortgage is being paid off. Deferred Mortgage interest statement will be given when paying off the loan. If payments are made on the loan, year end tax statement is still available for tax purposes. Consult your tax advisor for specifics.

Easy Approvals

At this time, credit and income are NOT a factor to qualify. These are often factors that decline a traditional loan. Approvals are based off of equity and age. However, always be sure to call for any updates to the guidelines.

Cash back

You may qualify to get money back at closing after paying off liens on your home. Money back will be in the form of:

• Monthly Income - Many people like the option of getting a monthly check the rest of their life. Amount of check varies with approval and are variable interest rate programs.

• Lump Sum - All available cash back given at closing in a lump sum. This option is a fixed rate and is fixed for the borrower(s) lifetime. Senior can use the funds for any reason.

• Line of Credit - Enjoy a line of credit that can NEVER be closed resulting in long term stability. This program is also a variable interest rate option. If you dont have an immediate need for the amount of cash back you qualify for, you may like this option as you only pay interest on funds used. Funds used are also not required to be paid back and are simply deducted from amount available.

Frequent Reasons People Get a Reverse Mortgage:


Home About Contact Boomers Resource Guide
Boomers Resource Guide is a special supplement to the Senior Citizen's Guide