As a senior homeowner beginning retirement, you may find that you have some financial questions about this new chapter in your life. Years ago, you may have wondered how to buy a home, how to renovate in order to increase your home’s value, and how to save for the time you reach the age of retirement. But now that you are here, you are wondering how to access your home equity, how much you can get, and how to best use it. As your biggest asset, your home is holding the equity you have built for the last thirty years, equity that you grew by diligently paying your monthly mortgage payments and investing in enhancements for your home. So what is the best way to access that equity in retirement while still meeting your goals?
Discovering the Reverse Mortgage
A reverse mortgage is a home loan that enables senior homeowners ages 62 and older to access the equity in their home with no monthly mortgage payment required. Repayment is deferred until you permanently move out of the home, sell the home, or pass away. In this manner, you are able to continue living in your home and keep your monthly expenses low while simultaneously converting your equity into cash to use however you would like. Does that sound too good to be true? Some people may think so; however with greater education many find that a reverse mortgage is a viable tool that could be useful to them.
The Pros & Cons of a Reverse Mortgage
When researching any financial product, it is important to understand both the advantages and disadvantages. You want to know what benefits the loan can offer you, as well as any risks involved. You want to know how reverse mortgages have helped other senior homeowners like you, and in what instances a reverse mortgage may not be the best answer.
Pro: Aging at Home
Con: Significant Equity Necessary
Reverse mortgages are popular because they offer a few benefits that other mortgage types cannot. With no required monthly mortgage payment, you are able to age at home without the stress of being foreclosed upon, as long as you comply with loan terms. For this reason, many seniors seek out this loan in order to be able to stay in their homes for the rest of their lives. However, in order to qualify for the loan, you must already have significant equity in your home to borrow against. Therefore, homeowners who recently purchased or refinanced the home may not yet have built up enough equity to be eligible.
Pros: Multiple Disbursement Options & Elimination of Monthly Mortgage Payments
Con: Borrower Obligations
You can choose to receive your funds in a multitude of ways: a monthly payment, a lump sum, a line of credit, or a combination of these three. All funds can be used to pay for anything you desire, such as credit card debts, medical bills, vacations, gifts, or daily expenses. With the elimination of payments associated with credit card debts and monthly mortgages, for example, comes the freedom to use disposable cash as you wish. However, there are a few obligations you still have as a reverse mortgage borrower. You must continue to pay homeowners insurance, property taxes, and basic maintenance or repairs of your home, or else you risk the loan becoming due and payable.
Pros: Federally-Insured & Non-Recourse
Con: Cost for Insurance Protection
The federally-insured version of a reverse mortgage is called the Home Equity Conversion Mortgage (HECM), and it protects you against owing more than the value of the home when sold. It also protects you by guaranteeing the continuation of your funds even if your lender were to go out of business. In addition, this federal insurance makes a HECM reverse mortgage a non-recourse loan, which ensures that lenders cannot liquidate any asset other than the home to repay the loan. In exchange for these safeguards, there is a mortgage insurance premium that is added to your loan balance. Because of this expense, as well as the closing costs associated with mortgage loans, this loan product may not be the best answer if you may move out shortly after closing. Reverse mortgages are generally more financially efficient if you intend to age in place.
Pro: Social Security, Medicare, and Pensions Not Affected
Con: Medicaid and Supplemental Security Income May Be Affected
Benefits such as social security income, Medicare, and pensions are not affected, but needs-based benefits may be, such as Medicaid and Supplemental Security Income. Individuals who receive these kinds of benefits should plan to speak with their financial advisor before moving forward with a reverse mortgage.
Reverse Mortgage Industry Insights
Now that you understand the reverse mortgage facts, the next step is to learn more about how it may benefit you personally. Reputable lenders in the reverse mortgage industry typically offer potential borrowers the chance to consult with a licensed professional for free to review the loan in a personalized manner. These experts will go over your exact situation in detail and help you map out how this financial tool can affect your finances. As a senior homeowner looking to improve your retirement, it is helpful to take advantage of the opportunity to ask as many questions as you can, dissect the product, and determine if it has use for you. In addition, it is the perfect chance to “interview” a lender to determine if they are a good partner with whom to go through such an important process. When talking to a reverse mortgage expert about this loan product, there are a few key questions that should be asked.
Is a reverse mortgage a good fit for me and what is the process like?
A well-respected reverse mortgage professional will want to make sure you understand the benefits as well as the risks. They will want to make sure you are comfortable with every aspect of the process. Therefore, they will take the time that is needed to walk you through each step and explain any uncertainties. They should be able to detail any costs and fees and answer with patience all questions you may have.
Do you offer HECM Reverse Mortgage Loans?
Reverse mortgages come in a few different versions such as proprietary loans (privately insured for high valued homes) and single-purpose loans (offered by state and local agencies for one purpose). But lenders who are approved by the U.S. Department of Housing and Urban Development (HUD) also offer a government-insured HECM reverse mortgage as well. Because of the extensive consumer protections included in the HECM, many seniors are most comfortable choosing it over the other options.
How long have you been in the reverse mortgage business?
Although the reverse mortgage industry is fairly new compared with the traditional mortgage industry, experience is still a key factor to your success and satisfaction. Reverse mortgage companies who have sprung up recently may have very little knowledge and experience when it comes to licensing, application, and underwriting procedures. As a savvy senior consumer, it would be in your best interest to apply with reverse mortgage lenders who have established a record of credibility. Additionally, characteristics such as being accredited and rated A+ by the Better Business Bureau, approved by FHA and HUD, and members of the National Reverse Mortgage Lenders Association (NRMLA) are marks of an established and trusted lender in the reverse mortgage industry.
There are multiple solutions for you if you want to access your home equity; you just have to choose the loan option that can best help you. If your goal is to age at home without a monthly mortgage payment, a reverse mortgage could be your answer. Take the time to research your options, ask questions, and understand the pros and cons of any loan product. If you do, you just may be well on your way to a financially enjoyable retirement.
Bio: Alberta Lim is the Digital Content Writer for American Advisors Group, the #1 Reverse Mortgage company in the nation. Writing all content for the company’s website, news and updates, and newsletters, plus being surrounded by the top Reverse Mortgage Professionals in the industry, means that she is no stranger to Senior Retirement Planning and Living.
Understanding the Pros and Cons of a Reverse Mortgage.” AAG.com. American Advisors Group. ND. Web. 25 June 2015. https://www.aag.com/news/the-pros-and-cons-reverse-mortgages
“Reverse Mortgage Pros and Cons.” Reverse.org. NP. ND. Web. 25 June 2015. http://reverse.org/reverse-mortgage-pros-and-cons/
“8 Questions to Ask the Lender Before Getting a Reverse Mortgage.” Caring.com. ND. NP. Web. 26 June 2015. https://www.caring.com/checklists/reverse-mortgage-preparation