You’ve probably seen and/or heard all those ads for reverse mortgages with all their nearly irresistible appeal. A reverse mortgage can indeed provide some much-needed financial relief for older homeowners struggling to meet expenses. There are, however, some drawbacks, and they aren’t always the best cure for retirement money problems. If you’re considering a reverse mortgage, you should carefully consider both the positives and negatives – for your unique situation. To help you make the right decision, here are the pros and cons of reverse mortgages for homeowners in Kauai.
What Is a Reverse Mortgage?
Reverse mortgages are designed for a fairly specific demographic and for some specific purposes.
“If you’re a property owner who is at least 62 years old, you can borrow against your equity to get cash or a line of credit from a lender. However, unlike a regular mortgage, you aren’t required to make monthly loan payments; you’ll repay the loan when you or your heirs sell the house.
“The most common type of reverse mortgage is known as a home equity conversion mortgage (HECM). These loans are backed by the Federal Housing Administration (FHA); borrowers pay an insurance premium in order to participate, which is used to fund FHA reserves. If a borrower fails to repay their loan, those reserves are drawn against to pay back the lender.”
In addition to the age requirement of 62, there are a few other qualifying criteria you’ll have to meet in order to get a reverse mortgage:
- You must own your home outright or have a substantial amount of equity.
- The home has to be your principal residence, and “you can’t be delinquent on any federal debt.”
- You have to pass a credit check and certain other eligibility requirements.
- You have to be current on property taxes, insurance, and HOA fees
The name derives from the fact that your “lender actually makes payments to you” – which is the reverse of a standard mortgage. “You can choose to receive a lump sum, monthly payments, a line of credit or some combination of those options.”
That amount you owe, instead of decreasing, grows over time. This happens because the interest and mortgage-associated fees are “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 isn’t due until you move out or die.”
When your [market-city] home is eventually sold, proceeds from the sale go to pay off the reverse mortgage debt. Any funds left over go into your estate, and if the sale falls short of the debt, your heirs aren’t required to make up the difference.
Pros of Reverse Mortgages
The pros of reverse mortgages include . . .
BETTER MANAGEMENT OF RETIREMENT EXPENSES
Most people see a significant reduction in income when they retire, and a reverse mortgage gives them the cash to supplement their income and meet expenses.
ABILITY TO STAY IN YOUR HOME
“Instead of finding a new, more affordable home, a reverse mortgage allows you to age in place (and stay near friends and family, if applicable).”
With the income from a reverse mortgage, you won’t have to pay taxes because the IRS considers that money loan proceeds rather than income. But be aware the interest isn’t deductible until it’s actually paid.
PROTECTION IN THE CASE OF BALANCE EXCEEDING VALUE
“Because reverse mortgage balance grows in size, it’s possible that it can exceed the fair market value of the property over time. However, the amount of debt that must be repaid can never exceed the property value.”
OPTIONS FOR HEIRS
“In an estate situation, heirs have several choices: They can sell the property to repay the debt and keep any equity above the loan balance; they can keep the home and refinance the reverse mortgage balance if the property’s value is sufficient; or, if the debt exceeds the value of the property, heirs can settle the loan by giving the title back to the lender.”
Cons of Reverse Mortgages
Now let’s consider the cons of reverse mortgages . . .
ACQUIRING DEBT THAT HAS TO BE PAID
“Reverse mortgages have costs that include lender fees, FHA insurance charges and closing costs. These costs can be added to the loan balance; however, that means the borrower would have more debt and less equity.”
LESS WITH FIXED-RATE OPTION
You have both adjustable-rate and fixed-rate options with HECMs, but the amount you can access with the fixed-rate option is less.
POTENTIAL VIOLATIONS OF OTHER PROGRAMS’ REQUIREMENTS
“Simply put, a reverse mortgage could cause you to violate asset restrictions for the Medicaid and Supplemental Security Income (SSI) programs.”
FORECLOSURE STILL POSSIBLE
Even with a reverse mortgage, which requires no monthly payments, foreclosure can still happen if, for example, you don’t pay property taxes, insurance, or HOA dues.
DIFFICULTIES WITH STATUS CHANGES
“Reverse mortgages can be complicated, and if something changes with your status, your reverse mortgage options can change, too. If you go to a long-term care facility, for example, would you still be considered a resident in your home? If you marry after obtaining a reverse mortgage, must your spouse move out of the property if you die?”
Making the Decision . . .
As should be apparent by now, reverse mortgages are fairly complicated, so deciding whether one is right for you will take some research and thought. But if two conditions obtain, it may be the option for you.
- You plan to stay in your home for a long time, maybe the rest of your life. You need to stay in the home long enough to justify the extra expenses involved in a reverse mortgage.
- You are able to cover all the other costs of homeownership. You just need to make sure that you can keep up with things like property taxes, homeowners insurance, and repairs and maintenance (as well as covering all your living expenses).
A reverse mortgage isn’t right for everyone. The best course is to enlist the help of a professional for some guidance toward the right decision. Your Kauai will be glad to assist you with her knowledge of these matters. So if you’re a Kauai homeowner looking into reverse mortgages, contact us today at 808-634-4518.