In some utopian dream world, no one would ever need a reverse mortgage program. After all, we would all have ample income, even in retirement, and miraculously we would be shielded from any possible financial need.
Here in the real world, however, millions of elderly homeowners are living on fixed incomes. Many need additional monthly cash to meet expenses, or would benefit from a safety net to protect against future financial emergencies. And the solution could be hiding in plain sight, literally right under their feet.
The HUD/FHA insured reverse mortgage, called the Home Equity Conversion Mortgage (HECM), unlocks housing wealth, so that it can be spent, as needed, without selling one’s home or incurring the monthly financial burden and risk of a conventional cash-out mortgage. The cash is non-taxable and can be used for any purpose. When the home is finally sold, all monies used are repaid along with accrued interest and mortgage insurance premiums—and any remaining profits belong to the senior homeowner(s) or heirs.
Sounds like a smart solution, right? So, let’s look at the pros and cons of a reverse mortgage.
REVERSE MORTGAGE PROS
- Unlock housing wealth and convert it to spendable cash — without selling your home or incurring monthly mortgage payments.
- Continue to own, inhabit, and enjoy your home – and realize the benefit of any future real estate appreciation.
- Choose between program options: a) lump sum withdrawal at a fixed interest rate, or b) a revolving line of credit at an adjustable interest rate.
- Make voluntary pay-downs at any time, for any amount. If pay-down is to a revolving line of credit, then the cash can be re-borrowed if needed.
- Cash received is not considered income, so is not taxed; interest on the loan, when paid, is considered tax-deductible home mortgage interest.
- Some or all of the available cash can be converted to guaranteed lifetime annuity payments.
- The unused portion of a line of credit has a guaranteed growth feature, and the growth rate increases alongside rising costs of living.
REVERSE MORTGAGE CONS
- Cash received is a loan, and must be repaid when the home is sold. The outstanding balance accrues interest and mortgage insurance expenses, and thus grows larger each month.
- There are fees (“closing costs”) to arrange the loan, and there may be monthly fees to service the loan. These fees are usually financed into the loan balance.
- Although Social Security and Medicare eligibility are not affected by a reverse mortgage loan, asset-tested government programs such as Medicaid could be affected.
- Income requirements: there must be sufficient household income, after expenses, to pay property taxes and insurance.
- Creditworthiness: borrowers must demonstrate a history of meeting their financial obligations.
- Age requirements: all eligible borrowers must be 62, and must own and occupy the property.
- Equity: the property does not have to be mortgage-free, but the proceeds from the HECM must be sufficient to pay-off any existing mortgages or other property liens.
If any of the bullets above sound confusing, the FHA is way ahead of you. They know that not everyone feels comfortable with financial terminology or personal finance decisions. So there’s one more item to add to this list of reverse mortgage pros and cons: safeguards designed to protect borrowers.
RERVERSE MORTGAGE SAFEGUARDS
All potential borrowers must be counseled about the HECM program by an FHA approved counselor, before an application can be processed. The counselor acts as an independent third party. Counselors work for HUD-approved counseling agencies, and have been trained, tested, and certified in the HECM counseling protocol.
The HECM is a “non-recourse” loan. When it’s time to repay the loan, 95 percent of the home’s current market value or the outstanding loan balance—whichever is less—is the payment required to fully satisfy the debt. Should the loan balance have exceeded the home’s value, the borrowers or heirs would not be required to use other assets to make up the difference.
Not everyone is approved. Upon analysis, some applicants fail to demonstrate the financial capacity or credit worthiness to fulfill their housing obligations, and they are not permitted to take advantage of the HECM program.
AARP surveyed its members and reported a remarkable 95 percent satisfaction rate from those who had experience with the FHA HECM program. It’s certainly not appropriate for everyone; but when used by those for whom it was designed, in the way in which it was intended, reverse mortgage pros far outweigh the cons.
Need more help researching or navigating the reverse mortgage process? Contact us anytime.