We’ve all seen the television commercials with celebrity spokespersons extolling the benefits of reverse mortgages for senior homeowners. Assuming you’re one of the millions of Americans over 62 with substantial home equity, how do you know whether a reverse mortgage is right for you? There are three fundamental issues every prospective borrower should address before deciding to proceed with a reverse mortgage.
1) Do you intend to stay in your home for the rest of your life, or at least for a fairly long period of time?
If a borrower decides to sell his or her home and move, the reverse mortgage becomes due and payable within six months. Because of the high closing costs associated with reverse mortgages, they are best suited to those homeowners who intend to stay in the home for a long time. As the upfront financed fees and costs are spread out over a longer period of time, they represent a better value.
The old rule of thumb was that if homeowners had not stayed in their home for at least five years after the close of a reverse mortgage, they probably did not get their money’s worth from the closing costs. The length of time in the five year “rule” is somewhat arbitrary for a couple of reasons, in part because the costs associated with reverse mortgages have come down in recent years and also because the perceived value of the fees depends on how much of the available funds the homeowner uses upfront. Still, the general principle is sound; reverse mortgages are best for homeowners who plan on staying in their homes.
There may be less costly alternatives to a reverse mortgage for homeowners who feel they need money now, but who don’t intend to stay in their homes for very long. For example, some homeowners who want to sell their home but can’t because they don’t have the money for needed repairs, may be better served by a single-purpose, deferred payment loan (DPL) than by a traditional reverse mortgage. Deferred payment loans are a type of reverse mortgage offered by local municipalities and counties to low-income seniors, usually for home repairs. These loans generally have far lower fees and interest rates than traditional reverse mortgages.
2) Are you concerned with the amount of residual equity you may or may not have for your heirs?
A reverse mortgage is not usually appropriate for the person who hopes to leave equity from their home to their heirs. Reverse mortgages are known as “rising debt, falling equity” loans. Since no repayment is required on a reverse mortgage for as long as the borrower lives in the home, the loan balance will grow over time due to the interest being charged on the amount of funds borrowed and the fees financed. The longer a homeowner has a reverse mortgage, the higher the loan balance becomes.
Depending on the interest rates, the home appreciation rate, how much of the available funds the borrower has actually withdrawn, and the value of the home at the time the reverse mortgage was obtained, a homeowner could very well deplete their equity through a reverse mortgage. The homeowner is protected against being forced to sell the home or repay the loan when the equity is depleted by the mortgage insurance; however, if the equity has been depleted there will be nothing left to leave the kids. The heirs would be given the option of keeping the home, however to do so they must pay 95% of the appraised value of the home or the loan balance, whichever is less.
3) Does the reverse mortgage serve its intended purpose?
In other words, will a reverse mortgage meet your immediate goals while enabling you to live comfortably in your home over the long run?
This issue must be honestly assessed prior to committing to a reverse mortgage. It is estimated today that at least 20% of all reverse mortgage borrowers are in some state of non-compliance—in other words, at great risk for losing their homes. Overwhelmingly, this problem is due to homeowners who can no longer afford their property taxes and/or homeowners insurance. There is no point in securing a reverse mortgage you cannot afford to keep for more than a few months to a couple of years. The costs are simply too high.
As part of the Department of Housing and Urban Development (HUD)-required reverse mortgage counseling that all prospective reverse mortgage borrowers must undergo, housing counselors here at Clearpoint Credit Counseling Solutions will thoroughly review your income, living expenses, debt, and assets to obtain a financial profile of your situation, both with and without a reverse mortgage in place.
Learn more about our reverse mortgage counseling.
Clearpoint Credit Counseling Solutions is a Department of Housing and Urban Development intermediary agency (approved to deliver housing counseling nationwide). Our CCCS counselors provide our clients interested in a reverse mortgage with one-on-one housing education at select branch locations. If these locations aren’t convenient to you, we also offer counseling over the phone.
Call 1.800.467.0906 today to schedule your reverse mortgage counseling session.