Reversing the Real Estate Game: Reverse Mortgages versus Selling Your Home
In the real estate world, there are many options for homeowners when it comes to handling their property. Depending on the situation and their goals, homeowners may consider selling their home or taking out a reverse mortgage.
Selling a home can be a huge financial gain for homeowners, as it provides them with a lump sum of money. This money can then be used for retirement, paying off debt, funding college expenses, or even starting a new business. But, there are other options like renting it out and using the funds to qualify for a new house (Click HERE for more on that), or taking out a reverse mortgage which we will talk about now!
Let’s Dive In!
What is a Reverse Mortgage
Reverse mortgages are a type of loan that allows homeowners to tap into their home equity without having to sell. The loan is only available to those 62 and older, and can be used for any purpose, including home improvements, medical expenses, or even for everyday living expenses, You decide.
The loan works by allowing borrowers to withdraw a predetermined amount of money from their home equity. The amount of money that can be withdrawn depends on the age of the borrower, the value of their home, and the prevailing interest rate. An important thing to note is that the interest rate on reverse mortgages is typically higher than on other loans. So, is it better to get one when rates are lower? YES…Your interest rate is an important factor in determining your principal limit (the amount you can borrow). Lower rates will increase the amount you're eligible to borrow and of course less interest you’d have to pay. But, you CAN refinance it if rates do drop in the future. You just can’t refinance any earlier than 18 months from when you closed on your original reverse mortgage.
Advantages
One of the biggest advantages of a reverse mortgage is that the borrower does not need to make any payments on the loan for as long as they live in the home. This allows them to maintain their lifestyle and keep more of their funds for other purposes. Another advantage is that the loan does not have to be repaid until the borrower passes away or moves out of the home, so they can pass the loan off to their heirs. The amount of debt that must be repaid can never exceed the property’s value, because a reverse mortgage is an example of “non-recourse” financing. The result is that a mortgage lender can have no claims against your other assets or heirs in this scenario.
Here are some other reasons:
You don’t have to move
You don’t have to pay taxes on the income
Can relax about having to manage expenses in retirement
Your heirs have options (you can end it at any time)
Disadvantages
One of the drawbacks of a reverse mortgage is that it significantly reduces the amount of equity in the home. For example, if the borrower takes out $100,000, then that is $100,000 less that can be passed down to their heirs. In addition, the borrower may be responsible for paying certain fees, such as closing costs and mortgage insurance premiums, which can add up over time. Origination fees are capped at $6,000 and depend on the amount of your loan. The FHA insurance charges and closing cost can be added to the loan balance; however, that means the borrower would have more debt and less equity. The borrower will also be paying pesky servicing fees each month that can be as high as $35 if your interest rate adjusts on a monthly basis.
Here are some other reasons:
You can’t deduct the interest from your taxes until you pay off the loan.
Your home can be foreclosed… foreclosure can happen - (if you fail to keep up with property taxes, homeowner’s insurance or required HOA fees.)
You could inadvertently violate other program requirements - (could cause you to violate asset restrictions for the Medicaid and Supplemental Security Income (SSI) programs.)
You could have a hard time navigating changes to your status - (If you go to a long-term care facility, for example, would you still be considered a resident in your home?)
Is it a good fit for you?
With all the potential complexities and risk of putting your home on the line, is a reverse mortgage actually a good idea? For some homeowners, the answer might be yes… or no. Here is my take on it. But, at the end of the day it’s up to you.
Who is a good candidate for a reverse mortgage?
You need more money to manage everyday expenses - If you’ve found yourself struggling to manage the expenses of retirement, a reverse mortgage could be your saving grace. With the ever increasing price of necessities and the the falling support of retirement funds this could be a life saver for some.
You anticipate staying in your home for a long time - Because of the added fees of getting a reverse mortgage it will take you staying in the home long enough to justify the extra cost. Also keep in mind if your area is high in appreciation it could be worth plenty more by the time you or your heirs plan to pay back the loan.
Your home must be your principal residence - meaning you live there the majority of the year.
You must either own your home outright or have a low mortgage balance - To get a reverse mortgage you have to have a solid amount of equity. You will need at least 40-50 percent home equity to qualify.
At least one borrower needs to be 62 or older. If neither of you are older then 62 you won’t be able to get a reverse mortgage.
Who is a bad candidate for a reverse mortgage?
If you’re planning to move - Steer clear of a reverse mortgage if you plan on moving as you won’t be able to keep it and will have to cover all the added fees. So, make sure you’ll stay in it long enough to justify the fees.
If you might need to move due to health issues - Because the property needs to be your principal residence it can get complicated if you go into a nursing home or extended hospital stays. If you are concerned about that it is best to speak with an attorney who specializes in elder law or a legal clinic before searching for a reverse mortgage program.
If you’re struggling to cover the other costs of your home - You can still be foreclosed on if you don’t keep up with your property taxes, homeowners insurance, and even HOA. Also, keep in mind in Alabama when you are 65 or older you could be exempt from all ad valorem taxes.
If you do plan on moving… consider selling your home and putting enough down on your new one to do a reverse mortgage on it!
Be very, very cautious about putting your home at risk.
There are a lot of scammers out there. So, be very carful that you go through a legit company. Here are some steps to getting a reverse mortgage.
Meet with a HUD-approved financial counselor. Because reverse mortgages are so complex, you’ll need to meet with an expert who can explain all your options.
Compare multiple lenders. Every lender is different and charges a different set of fees. Make sure you look at a number of options to find the lowest origination fees and closing costs and get the most competitive interest rate.
Talk it over with your heirs. If you’re aiming to leave your property to someone in your family, you should discuss your reverse mortgage plans with them.
Remember that you do have other options to access cash, too. Compare a home equity loan versus a reverse mortgage to see which one is a better fit for your needs if you’d prefer not to sell.
