We live in a world where you can buy anything you want on the internet. As a result, many of us have ordered items, have had them show up to our house, only to find out they were not what we had hoped they would be. There are a number of reasons this can happen. Maybe it’s because we did not read the description that was provided carefully enough. Maybe it’s because the quality of the product purchased was less than what it was promoted to be. Or maybe it was because someone was truly trying to take advantage of us. Regardless of the reason, the outcome is always the same. We are not happy with the item because it didn’t meet our expectations.
If there’s a retirement product out there that has gotten a bad rap because of unmet expectations, it’s the reverse mortgage. Therefore, it’s my plan to help you better understand what you can expect from a reverse mortgage, so you can make a better decision on whether or not a reverse mortgage is the right product for your retirement.
When you hear the phrase reverse mortgage, what comes to your mind? For many of you, it might be the recent ad you saw with Tom Selleck. For others, it may be the thoughts that it’s just a program created to steal your home. And then for others, you might be thinking how grateful you are for your reverse mortgage because it has helped you have a more safe and secure retirement.
I’m not here to make any recommendations on whether or not you should use a reverse mortgage. But I am here to talk about some of the key aspects of a reverse mortgage, so you can better decide if it’s an option for your retirement.
To start with, it’s important to understand there are two different types of reverse mortgages on the market. The first is government backed, and it’s subject to the truth and lending laws and is insured by the Federal Housing Administration. The second one is a proprietary reverse mortgage, which has very few regulations. The only security you have is the integrity of the company you’re borrowing from.
The reverse mortgage I’ll be talking about is the most popular of the two, and it’s the one that is backed by the government. The name of this mortgage is the Home Equity Conversion Mortgage. Because this loan is backed by the government, there are a number of qualifications you must meet if you’re going to choose one of these loans.
First you must be aged 62 by the date you close the loan. Second, you must own your own home; you cannot get a reverse mortgage on a property that is owned by someone else. You can use a living trust. Third, you must pay off all existing loans. This can be done prior to taking out the reverse mortgage, or you can pay it off with a part of the proceeds you receive from the reverse mortgage, or taking out for it, you must be current on all federal debt. You cannot have other federal loans that are in default and apply for a Home Equity Conversion Mortgage. Fifth, you do have to go through HUD counseling. This is a 60 to 90 minute session with an advisor who has met the requirements established by the government to qualify as a Home Equity Conversion to qualify as a Home Equity Conversion Mortgage advisor.
I do believe it’s important to note here that the term counseling session may be a stretch of terms. It really should be called an education session because the job of these counselors is not to help you make the decision. Their job is to help educate you, so you can make the decision yourself.
There are a number of payment options available to you from a Home Equity Conversion Mortgage as well. You have the option to take the money out in one lump sum, you can take out a credit line, you can request a monthly payment for a period of time, or you can use a combination of all these options. The most common method used by most people is the credit line method.
There are two main reasons for this. First, when you use the credit line method, you’re only charged interest on the amount you borrow. Therefore, you’re not stuck paying interest on money that you may have taken out of the loan and just put it into your bank account.
Second, the amount of money you can access increases over time. If you do not take all the money out initially, you’ll be able to take more money out each year. The factors that the government considers when determining how much money you can borrow from a Home Equity Conversion Mortgage are your age, your home’s value, the current interest rate, and the current lending limits established by the government.
Since each of these will affect the amount you’ll be entitled to borrow. Let me talk about each of them briefly.
Age – The younger you are, the less you will be able to borrow. The reason is because there’s more time for the unpaid interest from the loan to accumulate. The longer you can wait to get a reverse mortgage, the better off you usually are.
Your home’s value – Your loan amount is based upon a percentage of your home’s current value. The higher the value, the more you can borrow; the lower the value, the less you can borrow. Your best option for a reverse mortgage is when real estate values are at their highest.
Current interest rates – With a reverse mortgage, you do not make monthly payments, which means your outstanding interest is growing on a daily basis. The higher the interest rate is when you take out your loan, the less you’re going to be able to borrow. The lower the interest rate is, the more you’ll be able to borrow. You want to make sure you’re taking the interest rate into consideration.
Current lending limits – The current maximum home value used by the FHA is $765,500. If your home is worth more than this, you will only be able to borrow a percentage of this limit. Now you should also be aware that even if your home is valued at this amount, you’re only going to get a portion, and that’s going to be based upon your age.
Home Equity Conversion mortgages are offered with a fixed interest rate or an adjustable interest rate. The majority of borrowers will choose the adjustable rate loan because they can borrow substantially more money this way. When you get a fixed interest rate loan, all the proceeds must be paid out initially. The borrower will lose the freedom of a credit line and the monthly payment option.
Fees are another big issue you must consider when getting a Home Equity Conversion Mortgage. All loans will include the following fees: a loan origination fee, third party closing costs, mortgage insurance premiums, and a monthly servicing fee. The government does control a majority of these fees, but not all of them. If you’re considering a reverse mortgage, it’s not a bad idea to shop around for the best option. All these fees can be financed into the loan. Usually, there are very few, if any, out of pocket costs when you close the loan, but you’re still going to have to pay for them. Please take time to understand the fees and what you’ll be responsible for.
Now, there is a misconception out there that if you get a reverse mortgage and your home value decreases, you’re responsible to pay the difference. This is not true. The home itself is the only recourse there is for this type of loan. Therefore, as long as you do not break any of the loan covenants, you’ll be able to stay in your home until you pass away. Your loan covenants are going to require you to keep current on your taxes and insurance. You’re going to need to keep your property in good repair, and you must live in the home as the primary resident. As long as you keep doing this, you will not have to pay off the mortgage until you either sell the home or you pass away.
My goal is only educational. You’re going to have to determine how much a reverse mortgage is worth to you. What are you willing to pay to stay in your present home? Is the cost of a reverse mortgage better than selling or moving to a new home? Can you get by in retirement with your current income and assets? Or do you need to use the equity in your home to help cover some of your costs?
The last thing you might want to consider is if you have other options. If you’re in a situation where you need money in retirement, there are a number of state and local organizations that might be able to help you.
You also need to be on the lookout for warning signs from those selling reverse mortgages. If they’re insisting you sign immediately, you should be very cautious. The Home Equity Conversion Mortgage has been around for decades, and there should be no rush for you to get into this type of loan. Also, if someone is telling you how you should spend your reverse mortgage, that’s another big red flag. If someone is trying to sell you something, they’ll be recommending you use a reverse mortgage to pay for it. Be cautious. And if someone is recommending you use the money for investing, this could be another big issue.
Many people do use a reverse mortgage to invest in other assets to help them get a more safe and secure retirement. However, if you decide to choose this option, make sure you know what you’re getting into. You don’t want to try to solve a problem by creating a bigger problem.
There are five things you should consider before getting a reverse mortgage.
The first one is to consider waiting as I mentioned earlier. The older you are, the better, and the older you are, the better a reverse mortgage will work for you.
Second, you should consider other home equity options. This may include getting a traditional mortgage or a credit line.
Third, if you have a current loan, you should consider refinancing.
Fourth, you should consider downsizing. Determine if you can sell your home and get into a smaller place. Doing this often frees up equity that can be used to help provide for a better retirement.
And fifth, consider lowering your expectations. Nobody wants to hear this one. But for many people, it’s a very viable option. What they often find is they can be just as happy on a lot less income.
I do want to bring up some questions you should ask yourself before getting a reverse mortgage.
Number one: How do you intend to use your proceeds?
Number two: Do you fully understand your obligations? And what you’re signing up for? Number three: Will your spouse be a co borrower? Or are you going to eliminate them from the loan?
Number four: How will your loan be repaid?
Number five: Are you on any form of government assistance?
Number six: How long do you plan to remain in your home?
Number seven: Have you considered other strategies?
I know I’ve covered a lot of information, but I do it because I care about you and your retirement. I want to make sure you have the information you need to make the informed decisions you’re required to make.
If you want to learn more, sign up for my webinar on reverse mortgages here. In this webinar, I take about an hour to cover what I’ve covered here in only about 10 or 15 minutes. Therefore you’re going to be able to get access to a lot more information.
One last takeaway: Remember, only you can determine if a reverse mortgage is right for you. Education brings choices, and hopefully, you’ve got some additional education that can help you make a better choice on determining whether or not a reverse mortgage is right for helping you get to a tax free and risk-free retirement.