By Glenda Brass, MBA
Lately I’ve had quite a few questions surrounding reverse mortgages. Below, I’ve provided some general information. Though there’s a lot more analysis one should do prior to deciding whether a reverse mortgage is right for them, this will provide some basic understanding.
When you have a regular mortgage, you pay the lender every month to buy your home over time. In a reverse mortgage, you get a loan in which the lender pays you. There are three kinds of reverse mortgages: single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits; proprietary reverse mortgages – private loans; and federally-insured reverse mortgages, also known as Home Equity Conversion Mortgages (HECMs). The latter is the most common type of reverse mortgage.
If you get a reverse mortgage of any kind, you get a loan in which you borrow against the equity in your home. You keep the title to your home. Instead of paying monthly mortgage payments, though, you get an advance on part of your home equity. The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, (a warning here), a non-borrowing spouse may be able to remain in the home. Here are some things to consider about reverse mortgages:
•There are fees and other costs. Reverse mortgage lenders generally charge an origination fee and other closing costs, as well as servicing fees over the life of the mortgage. Some also charge mortgage insurance premiums (for federally-insured HECMs). The fees tend to be higher than for regular mortgages.
•You owe more over time. As you get money through your reverse mortgage, interest is added onto the balance you owe each month. That means the amount you owe grows as the interest on your loan adds up over time.
•Interest rates may change over time. Most reverse mortgages have variable rates, which are tied to a financial index and change with the market. Variable rate loans tend to give you more options on how you get your money through the reverse mortgage. Some reverse mortgages – mostly HECMs – offer fixed rates, but they tend to require you to take your loan as a lump sum at closing. Often, the total amount you can borrow is less than you could get with a variable rate loan.
•Interest is not tax deductible each year. Interest on reverse mortgages is not deductible on income tax returns – until the loan is paid off, either partially or in full.
•You have to pay other costs related to your home. In a reverse mortgage, you keep the title to your home. That means you are responsible for property taxes, insurance, utilities, fuel, maintenance, and other expenses. And, if you don’t pay your property taxes, keep homeowner’s insurance, or maintain your home, the lender might require you to repay your loan. A financial assessment is required when you apply for the mortgage. As a result, your lender may require a “set-aside” amount to pay your taxes and insurance during the loan. The “set-aside” reduces the amount of funds you can get in payments. You are still responsible for maintaining your home.
•What happens to your spouse? With HECM loans, if you signed the loan paperwork and your spouse didn’t, in certain situations, your spouse may continue to live in the home even after you die if he or she pays taxes and insurance, and continues to maintain the property. But your spouse will stop getting money from the HECM, since he or she wasn’t part of the loan agreement.
•What can you leave to your heirs? Reverse mortgages can use up the equity in your home, which means fewer assets for you and your heirs. Most reverse mortgages have something called a “non-recourse” clause. This means that you, or your estate, can’t owe more than the value of your home when the loan becomes due and the home is sold. With a HECM, generally, if you or your heirs want to pay off the loan and keep the home rather than sell it, you would not have to pay more than the appraised value of the home.
Depending on your current situation, a reverse mortgage may be just the thing you need to ensure your retirement is free from the stress of a mortgage payment. However, before proceeding in that direction, ask lots of questions and be sure you understand how it will impact you and your heirs over the long term. If structured properly, it can be a life saver, if not, it can be a life destroyer!