Getting a reverse mortgage can be a big step for a homeowner and is often considered as something “exotic” – at least compared to traditional mortgages. In addition, there are several factors you will need to consider before signing on the dotted line. This includes checking if there is a better option, how it will affect the plans for your estate, and even how long you want to remain in your home. Here are some insights on how to know if a reverse mortgage is right for you.
Is There a Better Option?
These loans are used to tap into the equity you’ve built up in your home with the monthly payments tied to a traditional home equity loan. So, on the surface, this might seem like a very good option. However, closing costs for a reverse.mortgage can be higher than traditional loans and you will need to meet underwriting criteria regarding how much you currently owe compared to the value of your home.
While this might keep some people from choosing a reverse mortgage, the program also has its advantages. For example, you won’t need to make any principal and interest payments as long the home remains your primary residence. In addition, you won’t have the tax implications tied to an outright sale of your home. If you are feeling overwhelmed by the permutations, let’s break it down into two simple questions. First, which option can get you the money you need? Second, how much will it cost? The answers will help to determine your view on the loan programs for homeowners 62 and older.
How Will You Repay the Loan?
Even though a reverse mortgage essentially freezes your mortgage payment until you sell your home, it will need to be repaid eventually. Compare this to a traditional home equity line of credit, which you will need to service (i.e. repay) during the life of the loan. As such, determining what is right for you will depend on your ability to repay the “loan”. For those who have adequate income, they might want to consider a traditional home equity line. But then again why would they when a reverse mortgage allows a borrower to bank the cash that would be used to pay the bank. In addition, most reverse mortgages are “non-recourse” loans. This means that if the sale price of the home is less than what is owed that the bank can’t go after the borrower or their estate for the balance.
Do You Want to Pay Off Your First Mortgage Today?
When it comes to reverse mortgages, you will need to payoff your first mortgage (and any second mortgages) with the proceeds of the loan. This is not negotiable as a key provision of these loans is that it will replace any existing loans on your home. However, this doesn’t mean that you will be out of pocket as the remaining balance on your current loan is not available to you via other mortgage options either. As such, the decision really comes down to how much you currently owe on your home and how much it is worth in today’s market. Keep in mind that if you treat your reverse mortgage as a line of credit some lenders will allow you to increase the loan amount, within limits, if the value of your home continues to increase.
Is Your Home Your Only Asset?
For today’s retirees, it is the best of times and it is the worst of times. Sure, the “Great Recession” was nowhere near as bad as the “Great Depression” but the generation that came before the Baby Boomers largely had the benefit of long-term employment, generous pensions, Social Security, and lastly, they knew how to save. Contrast this with the plight of Baby Boomers and subsequent generations many of whom do not have an employer pension, are saddled with tremendous debt and have serious questions about whether Social Security will be there for them when they need it.
For many, their only saving grace in retirement is their home. In this case, getting a reverse mortgage can help tap into the equity while foregoing paying back the loan immediately. Not only does this give the borrower the cash they need today but they also have the option to use some of this cash to invest for their future. While a borrower could do this with a more traditional loan, it is harder to do when you need to make a monthly loan payment.
Is a reverse mortgage right for you? The answer really comes to down to where it is the best option for you is, how you will repay the loan, what you want to do with your existing mortgage, and whether your home is your only asset.