When approaching retirement, you may find yourself in a situation where most of your wealth and savings is tied up in your home. So, how can you access it? Beyond selling it and downgrading to a smaller property, there are options for staying put—one of the most popular being a reverse mortgage. What facts about reverse mortgages do you need to know?
When you need access to the equity in your home, a loan that doesn’t require immediate repayment may seem like your best and only option. But it’s important to understand the fine print behind such a loan.
There are three types of reverse mortgage loans. The home equity conversion mortgage (HECM loan), also called the Federal Housing Administration reverse mortgage, is the most common type, while single-purpose reverse mortgages and proprietary reverse mortgages are less common.
Whether you’re unsure about your next steps or looking for more reverse mortgage information, these five facts about reverse mortgage loans as a home equity loan alternative will help you to make an informed decision.
1. Not Everyone is Eligible
Reverse mortgage loans were designed to help senior citizens enjoy their retirement from the comforts of their own homes.
This means that to be eligible for a reverse mortgage, the following must apply:
- You must be at least 62 years old.
- You must own the house.
- You must have enough equity (at least 50%).
- The house must be your primary residence.
If you, as a homeowner, don’t meet the requirements, learning this sooner rather than later can save you time and allow you to explore other options. A home sale-leaseback program doesn’t have an age limit and may be the alternative financial solution that’s right for you.
Can you get a reverse mortgage with bad credit? Well, a reverse mortgage loan typically does not require a minimum credit score. However, the reverse mortgage lender will instead look at your credit report and into the reasons why you obtained a bad credit score, along with other means, before deciding if you’re eligible or not.
2. Debt Increases While Equity Decreases
So, how much equity do you need for a reverse mortgage? The reverse mortgage lender will require at least 50% of your home equity. But now that the equity in your home is being converted into cash payments for you, your home’s value will decrease over time. As the equity decreases, the interest and fees collected throughout the loan’s life increases.
Keep the following in mind:
- Your interest rate will apply to a progressively larger loan amount over time.
- You won’t have to repay the loan for as long as you’re living in the house.
- If you were to sell the home, move out, or pass away, the loan would still need to be repaid.
Therefore, reverse mortgages in fact do not have a great loan term and aren’t a great option for those hoping to leave their homes as a real estate inheritance.
3. Maintaining Your Home is Still Your Responsibility
As a reverse mortgage borrower, while you may not have to worry about repaying the lender any time soon, you are still responsible for the other costs involved in maintaining your home.
Since you get to keep your home’s title, you are responsible for:
- Homeowners insurance
- Property tax
- Maintenance fees.
If you neglect these duties, the lender may ask you to repay the loan or sell the home if you are unable to afford it.
4. Your Reverse Mortgage May Impact Your Benefits
For reverse mortgage borrowers, benefits such as Social Security and Medicare are not affected.
However, other benefits such as Medicaid and Supplemental Security Income (SSI) can be affected, which is why it is important to consult with experts and professionals to understand how it may impact your personal situation.
5. Your Reverse Mortgage May Have An Effect on Your Family
It’s essential to consider what will happen to the reverse mortgage after you pass away. After all, this decision may impact those closest to you.
What happens afterward depends on whether:
- There is a co-borrower – Having a co-borrower (like an eligible spouse or partner) means that you both receive the reverse mortgage payment from the lender. It also means that if one were to pass away, the other would still be able to stay in the home and continue receiving the payments.
- There is no co-borrower – If your spouse is not a co-borrower or there is no co-borrower, then no one will receive payments and a “non-borrowing spouse” may be forced to move out or sell the home if they cannot afford the monthly payment.
- Your family wants to keep the home – The decreased equity could mean fewer assets for family members and heirs. And, to keep the home, any non-borrower family members or heirs would have to repay the reverse mortgage loan themselves.
Another fact, reverse mortgages can impact not only you but also those in your family, especially non-borrowing family members. Those who are living with you but are not a part of the loan may lose the house if they are unable to repay the lender.
Bonus Fact: You Have Other Options
Now that you have the reverse mortgage facts, you may be wondering what to do next. After years of working hard and saving to afford your dream home, it’s important to feel secure and informed in your decision-making.
While a reverse loan is one way to enjoy your home’s equity during retirement, keep in mind that you’ll be adding to your mortgage loan balance over time. This can have financial consequences for you (should you choose to move) and for your family.
Knowing that you have other options can offer you a sense of financial freedom to do what is best for you and your family.
If you’re seeking alternatives to reverse mortgages, a sale-leaseback program may offer a better solution to convert your home’s equity quickly without taking out a loan. Through a sale-leaseback agreement, you can sell your home, convert your home equity to cash, and lease back your house.
If learning more reverse mortgage information has left you unconvinced or feeling overlooked, explore alternative programs for retirees with a financial advisor and choose the best option for you. On the contrary, if you’re looking for how to get out of a reverse mortgage you’re already in, you can take a look at some of our helpful resources.
When approaching retirement, you may find yourself in a situation where most of your wealth and savings is tied up in your home. Whether you’re unsure about your next steps or looking for more clarification, these five facts about reverse mortgage loans as a home equity loan alternative will help you to make an informed decision. If you are still unsure of alternative options to securing this specific loan, after reading this article, consult a financial advisor to discuss your options.
- Investopedia. Reverse Mortgage. https://www.investopedia.com/mortgage/reverse-mortgage/
- Consumer Financial Protection Bureau. What happens to my reverse mortgage when I die? https://www.consumerfinance.gov/ask-cfpb/what-happens-my-reverse-mortgage-when-i-die-en-2096/