Reverse mortgages can serve as a useful tool to aging homeowners who require extra income to support their expenses and lifestyle during retirement. Unlike traditional mortgages, reverse mortgages do not require monthly mortgage payments, and the loan is not required to be paid until the borrow no longer lives in the home. There are number of factors to consider when weighing the pros and cons in evaluating whether a reverse mortgage is right for you.
How does it work?
Normally, when you take out a mortgage loan, the bank gives you a lump sum that you pay back with interest over time. At the end of the term, the loan is paid down to $0.
A reverse mortgage works in the opposite. The lender makes payments to you, and you can choose whether to receive a lump sum, monthly payments, a line of credit or some combination of those options.
The interest and fees associated with the loan get rolled into the balance each month. That means the amount you owe grows over time, while your home equity decreases. You get to keep the title to your home the whole time, and the balance does not become due until you move out or die.
When that time comes, proceeds from the home’s sale are used to pay off the debt. If there is any equity left over, it goes to the estate. If not, or if the loan is actually worth more than the house, the heirs are not required to pay the difference. Heirs may also choose to pay off the reverse mortgage or seek a refinance if they wish to keep the property.
Can anyone qualify for this type of mortgage?
No, not everyone can qualify. There are several requirements:
- Age. You must be at least 62 years old. Although many people think of a reverse mortgage as a way for people to bridge the gap between age 62 and 66 (full retirement age), if you wait until age 66, you will be able to get a higher payout. If a private lender, the age can be as a low as age 55 (depending on state law).
- Home equity. You must own the home outright or have significant equity (at least 50%).
- Residence. The home must be your primary residence.
- Federal debt history. Delinquent federal debt, like income taxes or student loans, can make you ineligible for a reverse mortgage.
- Housing counseling. You are required to undergo counseling with a HUD-approved reverse mortgage counselor.
- Primary Residence. You must continue to use your home as your principal residence.
- Property upkeep. You must continue to keep the home in good condition.
- Taxes and insurance. It is crucial to stay on top of your ongoing property taxes and homeowner’s insurance — otherwise you could lose your house to a property-tax lien foreclosure.
What are the benefits of a reverse mortgage?
- It allows you to stay in your home. The funds from the reverse mortgage can pay for your housing costs (taxes, insurance, repairs). For example, making home improvements to age in place with a reverse mortgage may be more affordable than selling and downsizing your home.
- You will have more financial freedom. If you choose to receive payouts from your reverse mortgage on a monthly basis, you will have a reliable flow of cash in your budget to help cover your living expenses.
- You can pay off debt. If you have unpaid medical bills or high-interest debt, you can pay off your balances with the funds from a reverse mortgage.
- Your spouse can stay in the home after you die or move out. Even if your spouse was not a co-borrower on the loan, they can stay in the home after you die or move into a long-term care facility — provided you were married at the time you took out the reverse mortgage. However, they must meet certain conditions set by the U.S. Department of Housing and Urban Development (HUD).
- Your reverse income is not taxed. The IRS does not consider reverse mortgage payments as income, so they are not taxable — regardless of whether you receive them as a lump sum, monthly income, line of credit or any combination of the three.
- You will not leave an underwater home to your heirs. Reverse loans have built-in protections that limit your heirs’ responsibility for any remaining balance after you die.
What are the disadvantages?
There could be a number of disadvantages:
- Your home’s equity will shrink. A big downside to reverse mortgages is the loss of home equity. Because you are not paying down your reverse mortgage balance, you will make less profit when you sell, or limit your borrowing power if you need a new loan.
- You will pay high upfront fees. You can expect to pay loan origination fees up to $6,000, upfront mortgage insurance premiums worth 2% of your home’s value and other closing costs. Reverse mortgages are more expensive than other home loan types. You will also pay origination fees at closing. However, you do have the option of rolling these costs into your loan balance, but that means you receive less money.
- You will reduce your heirs’ inheritance. As a reverse mortgage balance grows, the equity your heirs would receive is diminished. If they cannot repay the loan when you pass away or move, they will not be able to keep the home.
- You might lose your home to foreclosure. You are still responsible for paying property taxes and insurance, and if you default on your property taxes, you could lose your home to tax foreclosure. A reverse mortgage lender can foreclose on the home if you are not living in it for more than 12 consecutive months due to health care issues.
Also, upon borrower’s passing, the balance of the loan becomes due. Your heirs must determine whether they would like to keep the property, requiring them to satisfy the loan in its entirety, or to sell the property if they do not wish to or cannot afford to keep the home. If they fail to take any action, the loan will be foreclosed upon, and the lender will force the sale of the home.
How to determine whether a reverse mortgage is right for me?
Assuming you meet the qualification rules, a reverse mortgage may be a good idea if:
- You and your spouse want to and are able to stay in your home.
- You need additional funds to cover living expenses, pay for care or enhance your lifestyle.
- You have considered the needs of your heirs.
- You have built enough equity that after paying off any existing mortgage debt, you have sufficient funds to cover your on-going needs.
- Your home value is or has been increasing.
A reverse mortgage is likely a bad idea if:
- You feel strongly that your home should stay in the family when you die.
- You became disabled or need long term care that would lead you to move in with a family member in their home, or a long-term care facility.
- Your health is shaky or unpredictable.
- You are planning to move soon.
Why is it an important to work with an attorney before obtaining a reverse mortgage?
As mentioned above, there are a myriad of factors to consider when determining whether a reverse mortgage would be right for you. When used properly and in the right circumstances, it could be a valuable tool. However, you should get professional advice to assist you in analyzing your qualifications, and more importantly your current circumstances with an eye towards your future.
Russo Law Group, P.C. helps you and your loved ones with Estate Planning, Elder Law, Special Needs Planning, New York Medicaid Planning, Trust & Estate, Guardianship, Small Business Planning, and Real Estate law. We welcome you to contact our Garden City, Lido Beach, or Islandia, New York, law offices to learn more about how we can help address your real estate matters.
CLICK HERE to download our Reverse Mortgages Informational Pamphlet.
If you need assistance in determining whether a reverse mortgage is right for you, please do not hesitate to contact the real estate attorneys with Russo Law Group, P.C. While we have several office locations, we can also visit your home and offer virtual meetings for convenience.