Financial Flexibility Services
Start Date November 14, 2022
With Americans living longer to an average age of seventy-eight years, more seniors are turning to reverse mortgages to help supplement their retirement when existing funds become scarce. For some seniors, this can be a valid source of additional income in retirement. However, many choose to pass on this opportunity primarily because they don’t know what a reverse mortgage is or how it works. Keep reading to learn more about a reverse mortgage and if it is right for you or a loved one.
What Is A Reverse Mortgage and Why Would A Senior Need One?
A reverse mortgage enables a homeowner to access the equity in their home and turn it into cash. While the benefit of having more cash on hand may be obvious, why it can be beneficial for a senior may not be.
Depending on how much money an individual has saved for their retirement, it is possible they could run low on the funds needed to live their daily life and pay for necessities such as healthcare and prescriptions. Having a reverse mortgage can potentially let a senior stay in their home while still accessing additional funds to pay for necessities.
There are three main types of reverse mortgage loans:
- Single-purpose loans that are typically offered by state or local governments: As the name would indicate, these loans are used for a specific purpose only as designated by the lender and may be best for homeowners with a more moderate or low income.
- Loans insured by the Federal Housing Administration (FHA): These loans are insured by the FHA under the umbrella of the U.S. Department of Housing and Urban Development (HUD).
- Proprietary loans that are not insured by the FHA: These can work best for borrowers with a high home value.
Who Is Eligible for A Reverse Mortgage?
If a reverse mortgage sounds like something you might be interested in, it is best to make sure that you are eligible to apply for one as there are several guidelines that applicants are required to meet for Home Equity Conversion Mortgages (HECM), which is one of the most common types of reverse mortgage loans. Homeowners of age sixty-two or older must:
- Use the home as their principal residence
- Have a home that meets minimum property standards
- Own the home or have a relatively low mortgage balance
- Not be delinquent on any federal debt
- Have enough money of their own or from a reverse mortgage to pay ongoing property costs such as insurance, taxes, and maintenance
It is worth noting that if an individual is eligible for a reverse mortgage there are several additional guidelines a borrower must also agree to, including:
- Completing reverse mortgage counseling to review the entire process
- Submitting to a financial assessment to ensure they can adequately handle loan related financial obligations
For borrowers with a spouse under the age of sixty-two, they may be able to arrange for the non-borrowing spouse to stay in the house even if the borrower passes away.
How Do Reverse Mortgages Work?
Understanding how the reverse mortgage process works in general can be fairly easy. The specific details involved with reverse mortgages are where things can be a little more complicated, due to the number of unique variables each applicant brings to the table.
An individual must meet eligibility requirements for a reverse mortgage. If eligible, they must then consider how much money they need or want to borrow and weigh that against how much they will be allowed to borrow. This determination is usually made on factors such as the individual’s age and property. During the course of a reverse mortgage, individuals must keep up the home and continue to pay property related expenses such as homeowner’s insurance and taxes.
For more specific information about how a reverse mortgage would work for you and your unique situation, it can be a good idea to sit down with a trusted organization, such as the Senior Estate Concierge, that can guide you to reputable and experienced industry contacts.
How Much Do Reverse Mortgages Cost?
Ultimately, how much a reverse mortgage costs will depend on the specific type of loan you choose and the entity lending it. In addition to the cost of the loan itself, the recipient will also need to pay costs associated with required housing counseling. This amount may also vary from person to person based on several different factors.
Other fees associated with reverse mortgages can include:
- Origination fees
- Property closing costs (appraisals, inspections, etc.)
- Initial and annual mortgage insurance premiums
- Interest on the loan
- Service fees
- Homeowner’s insurance
- Property taxes
A final word about reverse mortgages is that they work like most loans in that the longer you have the loan, the more you may have to pay in ongoing costs. For this reason, it is typically recommended that seniors looking to get reverse mortgages do not take out a loan for more than they really need.
If you have questions for yourself or a loved one about reverse mortgages and if they would be right for you, please reach out to Senior Estate Concierge for more information.