Still asking, “What is a reverse mortgage?” Well, so was I… I’ve seen the commercials, and while Tom Selleck’s mustache is ‘on point’, does he actually have any clue what he’s talking about?
It always gets me seeing these wealthy actors trying to relate to “the common American” as they discuss the financial decisions “all of us have to make”… I mean, c’mon, Tom – we all know you’ve been on either Magnum PI or Blue Bloods for the past 45-ish years. Don’t come at me trying to make us think you’ve actually considered a reverse mortgage, let alone actually know what one is and how it works.
But that mustache… Any man with that capability surely has at least some of his ducks in a row.
So while I honestly had no clue what a reverse mortgage is, I had to enlist some guest posting help. Melissa responded with the great explainer below that actually helped me answer the question of, “What is a reverse mortgage, anyway???”
Take it away, Melissa:
What to Know Before Pursuing a Reverse Mortgage
So, you’re thinking about retiring? Whether you’re retiring early or have worked your way to this point, congrats! It’s an amazing achievement. If you’re like the rest of American retirees, you’re probably feeling a bundle of mixed emotions. On one hand, you’re finally free to spend your days as you please. On the other, you’re desperately hoping you’ve saved up sufficiently to cover future expenses.
Worried that your savings won’t be enough? A reverse mortgage could be the solution. Here’s what you need to know before you pursue that option.
What is a Reverse Mortgage?
A reverse mortgage is simply the opposite of the traditional mortgage process. Instead of paying off the loan to gain equity in your home, you sell equity in your home to the lender in exchange for a monthly, tax-free sum. To qualify for a reverse mortgage on your house you need:
- To be retired
- To be at least 62 years old
- To own a home in full
If you don’t plan on passing down your home to your children, this is a much better option than going into debt. It will allow you to enjoy the benefits of additional cash flow while remaining in your home. The bank doesn’t recoup their equity until after the house is vacated and sold.
There are Fees Associated with a Reverse Mortgage
The hud reverse mortgage guidelines state that there are 3 primary fees associated with a reverse mortgage:
- Origination Fee – A fee capped at $6,000 that’s derived from 2% of the initial $200k, and then 1% of the remaining mortgage value.
- Third-Party Fees – Some smaller fees paid to third parties for tasks such as the inspection or appraisal.
- Mortgage Insurance Premium (MIP) – Per the HECM guidelines, 2% of the property value needs to be paid out to the FHA.
A Reverse Mortgage and a Home Equity Loan aren’t Synonymous
Although there are some similarities between the two, they’re not the same:
- Home equity loan – To qualify, you need to have an adequate income and you must make monthly payments on both the principal and the interest rate. You are also subject to a credit check to see how much you can borrow and at what interest.
- Reverse mortgage – To qualify, there is no credit check, no monthly mortgage payment, and no monthly income requirements. That said, you still need to pay real estate taxes, insurance, and maintenance costs.
Pay Off the Existing Mortgage
Do you already have an existing mortgage? Have you paid off all of the fees? You’re required to pay back all your debts before you receive any cash. Initial equity proceeds lead to immediately payoff:
- The existing mortgage
- The property taxes
- Homeowner’s insurance
- Home maintenance costs
When you determine how much money will be at your disposal, it’s critical that you keep these costs in mind, lest you be caught off guard and unable to pay your debts.
How Long Do You and Your Family Plan on Living in the Home?
Have you considered your long-term plans? If you plan on living in your home for the rest of your life, a reverse mortgage can be a solid strategy for borrowing money. However, if you only plan on living there a short time, it may not be worth it because of the insurance premiums, higher interest rates, and larger initial costs.
Does Your Spouse Plan on Staying in the House in the Case of Your Death?
Did you know that if your spouse is a co-borrower and either of you moves to a nursing home or passes away, the other spouse can continue living in the house while receiving money from the reverse mortgage? In some cases, you can qualify as an eligible non-borrowing spouse even if you are not 62. This also qualifies if you haven’t moved out of the home for longer than 12 months.
Take the time to thoroughly discuss worst-case scenarios so that neither of you are caught off guard by a tragedy.
Taking out Your Reverse Mortgage
A reverse mortgage could be a lifesaving source of retirement income. However, before you begin this process, thoroughly discuss your options with your financial planner and your spouse. When determining whether or not a reverse mortgage is right for you, consider your current income stream, estimated costs, and future plans.