by Tom Murphy
NMLS # 662141
Home Services Lending
If you are thinking about getting a reverse mortgage loan to tap into your home’s built in equity, there are some tips and secrets that you should know. Let’s take a look at the most important ones so you know if getting a reverse mortgage, also known as a HECM or home equity conversion mortgage is a good idea for your personal situation.
What Are Reverse Mortgages?
This loan allows homeowners that are 62 or older to access their home’s equity while they are still living in the home and keeping title. Borrowers may use the money to pay for essential health care expenses, home repairs, or possibly for investments. Homeowners need to have high equity in the home, and they have to be able to keep paying taxes, property insurance and maintenance throughout the loan. Reverse mortgages can be great tools for older homeowners, but there are many things to think about:
Lenders will charge closing costs
Nothing is free in life, and reverse mortgages do cost you. Lenders usually charge you an origination fee, mortgage insurance premiums, and other standard mortgage closing costs. You should talk to your lender about these fees up front.
Balance will increase
You will not be making any payments towards the loan and interest that is accruing, so the balance on the home loan is going to increase with time.
Different interest rates
Some reverse mortgages have a fixed interest rate and others will have a variable interest rate. You should talk to your lender about which one is best for your situation.
A reverse mortgage loan can use up all of the equity in your home, but you only need to repay the value of the property. The reverse mortgage product can be originated as a first or second mortgage loans. Most of these equity loans have a non-recourse clause that will not allow borrowers or heirs from owing more than the home is worth. So, if you have a reverse mortgage and borrow $200,000, and you die and leave the home to your children, they may repay the $200,000 and keep the home. Or they can sell it. If they only get $175,000 for the home, they do not have to repay the balance.
Interest not deductible
A reverse mortgage is a loan and is not an income source, so you cannot deduct the loan amount when it comes time to pay your taxes.
Find a Good Reverse Mortgage Lender
It is a good idea to look for a lender who focuses on reverse mortgages. Some of these lenders will also sell insurance and annuities. A reverse mortgage is a big decision and you should not do it without thinking through it very carefully.
How to Know If a Reverse Mortgage Loan or HECM Is Right for You
There are many things to consider when you are thinking about a reverse mortgage:
- Are there other ways to get the money you need? Before you use your home equity, you may want to look at other ways to cut your expenses. One of the major ways to cut expenses as you get older is to downsize into a smaller home.
- Should you tap home equity now? Home equity is usually the last source in case of a financial emergency. Many experts would say that you should save your equity as a last resort. However, tapping your home equity can be a good idea; you just have to be sure that you are doing it for the right reasons. If you have a health emergency and have no other source of funds, it may be necessary.
- Are you living on a fixed income? If you have a low income and no other assets, a reverse mortgage may not be what you want to do. If you do a reverse mortgage and then you cannot pay property taxes, you could lose the home. Again, you may want to consider downsizing rather than using equity out of your home. You could use money from the sale of your home to buy a smaller one.
- Do you want to leave the home to heirs? If you get a reverse mortgage, your heirs will have to sell the home to pay back the lender.
- How long do you want to live in the home? If you want to stay in the home for a long time, it can make sense to get a reverse mortgage. But if you do not want to stay there for more than a few years, this can be an expensive way to get money. This is because you have to pay high upfront costs to get the mortgage, and you will have to pay insurance premiums.
- What will the fees be? Fees for getting a reverse mortgage will depend upon the type of mortgage you select. Fees can be high, so you should shop around.
- How will you pay for the house’s expenses? You need to be able to pay the property taxes and homeowner’s insurance or you can lose the home.
- What does your spouse want to do? If you die, does he or she want to continue to live in the home? If you take out a reverse mortgage and the spouse is not a co-borrower, he or she will have to move out or pay back the loan if you pass away.
Summary of Reverse Mortgage Programs
There are many good reasons for getting a reverse mortgage. If you have an emergency expense that you need the money for, it can make sense to get a reverse mortgage. Health care and long term health care expenses are two of the most common reasons that people get these loans.
However, these loans do have long term costs and considerations that should be weighed carefully. Probably the biggest is that when you die, the heirs either have to pay back the loan or sell the house so that the lender gets their money. This can be a difficult thing to do, both emotionally and financially for many people. But, you should weigh all of the pluses and minuses to decide if a reverse mortgage works for you.