A reverse mortgage loan can be a great financial tool for homeowners age 62 and older who have built up significant equity in their home. Borrowers who take a reverse mortgage loan may receive payments in the form of a lump sum, monthly payments or a line of credit, and they can use the funds however they would like.
This can be beneficial for senior homeowners who are having trouble making ends meet, need extra cash to fund home repairs, to pay for medical costs or even just to save for a rainy day.
A reverse mortgage loan is still a loan, and there are some potential downfalls that should be considered. We have created a list of some top concerns that should be reviewed before one considers a reverse mortgage loan.
- Reverse mortgage loans can be confusing. Despite what the commercials say, getting a reverse mortgage loan takes more time and effort than just making a phone call. Some key factors that are considered for a reverse mortgage loan include the value of the home, the age of the potential borrower and how much the potential borrower still owes on their mortgage. Fortunately, a good lender will discuss the entire process with a potential borrower before the loan process begins so borrowers should be aware of the timeline and requirements.
- Reverse mortgage loans can be expensive. All borrowers should be aware of the costs of a reverse mortgage loan. There are origination fees, other closing costs, mortgage insurance premium (MIP), interest, and servicing fees. With a reverse mortgage, the loan balance accumulates over the life of the loan. A majority of the fees are included in the reverse mortgage itself, so the only out of pocket expense is the Department of Housing and Urban Development (HUD) counseling fee. Potential borrowers should ensure that they understand and feel comfortable with the fees before taking a reverse mortgage loan.
- Reverse mortgage loans must be paid back. A reverse mortgage is still a loan which must be repaid. Commonly, the loan is repaid through the sale of the house when the borrower passes away or moves out. If the borrower’s heirs choose to keep the home, then they must repay the loan.
- Reverse mortgage loans are best suited for homeowners who plan to stay in their home long term. If a homeowner is strapped for cash, but plans to move in a couple years, a reverse mortgage loan is probably not their best option due to the costs of originating the loan. If a homeowner plans to live in their home for many years to come, the costs associated with the loan can be well worth it.
- Potential borrowers should do their own research. Reverse mortgage loans are not a one-size-fits-all solution. Potential borrowers should meet with a trusted financial advisor to discuss their financial goals and other options. All reverse mortgage borrowers must meet with a reverse mortgage advisor who will explain the process, the costs and will answer any questions the borrower has about the loan. In addition, all borrowers must meet with a HUD approved counselor.
While reverse mortgage loans are not appropriate for all homeowners, they can be suitable financial tools for others. Potential borrowers will need to weigh their options and make an educated decision based on their needs and financial goals. More information can be found by calling 800-976-6211.