Are YOU a good Fit for a reverse mortgage? Take this quiz and find out

Are You a Good Fit for a Reverse Mortgage? Take This Quiz and Find Out

June 6, 2014 | by Editorial Team

Have you been considering a reverse mortgage loan, but you’re not quite sure if it’s the right fit for you?

Home Equity Conversion Mortgages (HECMs) are insured by the Federal Housing Administration and allow qualified homeowners to borrow against the equity they’ve built up in their homes in the form of a non-recourse loan.

The non-recourse feature guarantees that you’ll never have to repay more than what your home is worth, in the event your loan balance eventually exceeds your home’s current appraised value. Thanks to the government insurance, you can rest assured that reverse mortgages are a safe financial product.

Still not sure? Take our quick, five-question quiz to assess whether you’re cut out for a reverse mortgage.

1. Are you (and your spouse, if applicable) 62 or older?

The federally-insured reverse mortgage program requires borrowers to be age 62 or older. In order to take out a reverse mortgage and remain on the home title, you and your spouse, if you have one, must both meet the age qualification.

2. Do you own your home outright, or own with a small mortgage balance?

The amount you can get from a reverse mortgage depends on a few factors, including your age, your home’s appraised value and the amount of equity you’ve built up, and current interest rates.

If you still owe a large amount on a “forward” mortgage, there’s less equity available for you to tap into. Conversely, if you own your home outright, you’ll have more equity to access.

3. If you do still have a mortgage, are you looking for a way to pay it off?

Are you are an older homeowner with an existing mortgage? A growing number of seniors are retiring with mortgage debt, according to a new report released by the Consumer Financial Protection Bureau.

Around 80% of people aged 65 and older are homeowners, but as of 2011, 30% of them were still carrying mortgages. Among homeowners age 75 and older, more than 21% still have mortgages.

Did you know you can use a reverse mortgage to pay it off and eliminate your monthly mortgage payments? The HECM program requires borrowers to repay any existing mortgage debt, but reverse loans do not become due and payable until you leave your home or pass away.

4. Are you planning on “aging in place,” and do you want to make any home modifications to achieve this goal?

A whopping 90% of people age 65 and older have indicated a desire to stay in their current home for as long as possible, according to AARP. If that describes you, a reverse mortgage could help you achieve your goal. Reverse mortgages can be used for funds to carry out certain home modifications to enable aging in place.

Remodeling to create a safer living environment could range from installing grab bars in strategic locations to creating low or no-threshold entries or even widening hallways and doorways.

5. Will you most likely be able to comfortably live in your home for the foreseeable future?

Like most financial products, reverse mortgages come with some upfront fees and costs. For many borrowers, the expenses associated with taking out a reverse mortgage are well worth it down the road. However, if you’re only planning on remaining in your home for a couple more years, or you think you may need to move soon because of health issues, then a reverse mortgage may not be the right fit for you.

If you answered mostly “yes” to the questions above, you may be a great candidate for a reverse mortgage 

Why do People HATE Reverse Mortgages?

Why Do People Hate Reverse Mortgages?

June 12, 2014 | by Editorial

Despite hundreds of thousands of older Americans taking out reverse mortgages and surveys showing that these retirees are happy with the results, some people still have a strong distaste for them.

In nearly every case, if you dig a little deeper, much of the hatred for reverse mortgages comes from misunderstanding or lack of knowledge about the product. Here are some of the top reasons why people might hate reverse mortgages—and some counterpoints to consider as well.

Fear of the unknown

If you don’t know how a reverse mortgage works but you have heard it has a bad rap, you may dislike it purely by instinct – things that are new or confusing are often rejected. But rather than knock something you haven’t learned about, here are some facts to help you understand reverse mortgages.

Most reverse mortgages are obtained via the federally-insured Home Equity Conversion Mortgage (HECM) program. Homeowners age 62 and older can borrow against the equity they’ve built up in their homes in the form of a loan. HECMS are non-recourse, meaning you’ll never have to pay more than what your home is worth at the time of sale, even if your loan balance ends up exceeding the value of the home.

While there are some requirements of borrowers—including remaining current on homeowners insurance, property tax, and home maintenance—you’re free to use your loan proceeds however you see fit.

Reverse mortgage myths

There are a couple of reverse mortgage “myths”—common beliefs about the loan that aren’t founded in facts.
Those myths include:

• The bank will own your home
• You might lose your home or get kicked out
• There’s no way for adult children to inherit the home

One of the biggest misconceptions around reverse mortgages is that the bank will own your home if you get a reverse mortgage. This isn’t true at all. When a homeowner takes out a reverse mortgage, he or she retains the title to the home, just like in a traditional “forward” mortgage.

Reverse mortgages don’t become due and payable until the last surviving borrower dies or leaves the home. As long as you fulfill certain requirements related to taxes, insurance, and upkeep, you won’t get kicked out of your home.

While reverse mortgages do need to be repaid (which is often accomplished by selling the home), that’s not your only option. If adult children have a sentimental attachment to the home, or want to keep it in the family, heirs have the option of repaying the reverse mortgage through other means available to them. And if the home is sold to pay off the loan, there is often some money from the sale that is still inherited by your heirs.

Adult children want an inheritance

Many adult children don’t like the idea of their parents borrowing against their home equity because those children want to receive an inheritance. While it’s true that heirs will be responsible for repaying the loan once their parents pass away, there are a couple of factors to keep in mind.

Reverse mortgages insured by the Federal Housing Administration are non-recourse, which means adult children will never have to pay more than the home is worth at the time of sale.

“When a reverse mortgage becomes due and payable as a result of the borrower’s death and the property is conveyed by will or operation of law to the estate or heirs, that party (or parties if multiple heirs) may satisfy the HECM debt by paying the lesser of the mortgage balance or 95% of the current appraised value of the property,” explains reverse mortgage group the National Reverse Mortgage Lenders Association in its consumer Guide to Reverse Mortgages.

Adult children should also realize that there might be money left over after their parents take out a reverse mortgage. If the borrower’s heirs decide to repay the loan by selling their mom or dad’s house, any money left over after paying off the loan goes to the heirs.

Reverse mortgage fees

A reverse mortgage has fees that are similar to any other loan insured by the Federal Housing Administration. These include an initial mortgage insurance premium of 0.5% or 2.5% depending on the amount you take out. In addition, over the life of the loan you will be charged an annual mortgage insurance premium of 1.25% of the mortgage balance.

These fees all go to insure your loan and make sure you always have access to any remaining funds, even if your lender goes out of business. It also provides the non-recourse guarantee, which means you will never owe more than your home is worth at the time of sale.

In addition to the fees that borrowers pay to the Federal Housing Administration, there are standard title, taxes, and lender fees that vary depending on the provider. The good news is that lenders are not allowed to charge an origination fee more than $6,000 according to the Department of Housing and Urban Development, the agency that manages the program.

Loan balance that grows

Some people might not like reverse mortgages because they are a negatively amortized loan, which means that the loan balance grows over time. This is different than a traditional mortgage, which sees its loan balance get smaller as borrowers make payments each month.

Since borrowers pay for mortgage insurance, the threat of the loan balance growing too high is minimized because borrowers are protected if the loan balance ends up being more than the home is worth.

While every situation is different, a survey from AARP found that nearly 90 percent of people over age 65 want to stay in their residence for as long as possible. AARP also reported that 93 percent of borrowers said their reverse mortgages had had a mostly positive effect on their lives, compared to 3 percent who said the effect was mostly negative.

A reverse mortgage might not be the right fit for each person, but it’s time people start realizing it’s a safe way to enable older Americans to remain in their homes and live a comfortable retirement