Reverse Mortgage Pros and Cons
REVERSE MORTGAGE PROS AND CONS – WHAT YOU NEED TO KNOW
There are advantages and disadvantages to many things in life. Reverse Mortgages are no different. Examine the pros and cons of a Reverse Mortgage, then decide.
The PROS of Reverse Mortgages
• Tax free income insured by the Federal Government which continues as long as your home is your primary residence. Freedom from stress and worry.
• Change your plan at any time from a line of credit, cash out, monthly checks, or a combination (depending on what remains.) The remaining Line of credit grows each month at half percent over the current interest rate.
• The HECM Line of Credit (LOC) option has many advantages for the borrower. First, the line of credit grows over time at the SAME EXACT rate as the interest rate on the loan. If you let the line sit there untouched for say five or ten years, it will be substantially larger at the end and ready for you to use. You are not charged interest as it's not considered interest but a growth rate. Also, the line of credit cannot be cancelled by the lender. You also do not have to qualify with a particular credit rating in order to get a HECM or qualify for the line of credit. While there is a financial assessment in order to ascertain if you can pay your taxes and homeowner's, there is no requirement to have a particular credit rating. I find this line of credit feature to be a tremendous benefit for those who choose monthly stipends and also a line of credit.
• A great option for seniors wanting to remain in familiar surroundings and in the same community where they've lived for years.
• Moving from one's home can cause emotional turmoil and stress for many senior homeowners. Memories were made in your "home sweet home", and proximity to loved ones may seem a much better option.
• Reverse Mortgages can satisfy existing mortgages or other debt which is a plus. (Note: These debts will be transferred to your Reverse Mortgage and interest will accrue.)
• You can remain in your home as long as you wish no matter what is owed the lender. You can never be forced out of your home as long as your real estate taxes and homeowner's insurance are paid and as long as you maintain your home. And if your spouse was underage, after your passing your spouse will still be able to live in the home.
• You can refinance your Reverse Mortgage again and again as long as there is equity in your home
• If you sell the property, you can never owe more than your home is worth. Upon your passing, however, should your heirs decide to keep the home, the lender will require repayment of the full mortgage debt.
• None of your assets can be attached to repay the Reverse Mortgage debt. Additionally, the debt does not pass to your heirs or your estate. The house stands for the debt. (This is called a non-recourse loan with no deficiency judgment.)
• Reverse Mortgages have safeguards: capped interest rates, a limitation on fees, HUD counseling, asset protection (non-recourse loan), no maturity date (cannot become due during a borrower's lifetime (goes to age 150.
• Your heirs may be able to claim the interest from your Reverse Mortgage on their income taxes.
• Use proceeds for long term care or other expenses such as repairs on your home or even a vacation or new car purchase.
The CONS of Reverse Mortgages
* A Reverse Mortgage has all the typical closing costs one finds with a typical FHA mortgage. But fees are higher than with a traditional mortgage. There is an up front Mortgage Insurance fee (MIP) which is mandated by the FHA and which cannot be eliminated. HECM counseling is another cost though it is minimal. As for other closing costs, title fees, recording fees, origination fees , these are costs that all mortgages have.
• A Reverse Mortgage can reduce your children's and grandchildren's inheritance. A Reverse Mortgage is a rising debt loan since no mortgage payments are being made, the opposite of a typical mortgage where equity increases as mortgage payments are made.
• Selling your home can often provide a greater return on your investment than a Reverse Mortgage.
• Moving from your residence in less than five years makes a Reverse Mortgage impractical. It does not make good sense to use a Reverse Mortgage short term.
• If you fail to pay your real estate taxes or homeowner's insurance or neglect to maintain your home, the lender may require repayment. (Reverse Mortgage lenders, however, will work with you to cure the default.) • If you leave your primary residence for a period exceeding 12 consecutive months, the Reverse Mortgage will become due. (Nursing homes, assisted living, etc.)
• If your heirs wish to benefit from your home after your passing, they can sell the property and keep the remaining equity or they can get their own mortgage. However, in keeping the home the full balance will be due. • Medicaid may be affected, and you may not qualify for benefits unless you spend down your Reverse Mortgage proceeds each and every month. (Check with your attorney and Medicaid to discuss Medicaid's parameters.)
When NOT to get a Reverse Mortgage
• An equity loan (if you qualify) may be a cheaper way of getting cash out of your home as closing costs may be lower.
• If your primary goal is fixing up your home and a community loan provides adequate funds, a Reverse Mortgage is not your best option.
• If you are ill and assisted living or a nursing home is imminent, do not choose a Reverse Mortgage.
* If your financial situation will preclude you from paying real estate taxes, insurance, and maintaining your home, forego a Reverse Mortgage.
* If your children invite you to live in their home and spend your remaining years with them, this may be a better alternative than staying in your home.
I hope this helps in answering questions as to when to do a Reverse Mortgage and when not to do a Reverse Mortgage. Please call me with your questions..
Reverse Mortgage Closing Costs
FHA Closing Costs
I hear potential borrowers decrying closing fees, but when you consider the benefits to the loan and what you can achieve, it's all relative. All closing costs can be financed into the loan except the appraisal fee and counseling fee. HECM Counseling, which is required by HUD, is a fee that can be waived based on income status. Here are typical reverse mortgage fees:
FHA MORTGAGE INSURANCE
This fee at closing (which is almost always financed in the loan) is 2% of the appraised value of the home and .5% of the ongoing/outstanding balance. You will get a statement each month showing the costs of the loan as it accrues.
THE ORIGINATION FEE
This fee is the lender’s fee. The maximum fee is set by FHA and is 2% of the first $200,000 of your property value and 1% over $200,000. The maximum origination fee is $6,000.
TITLE FEES & OTHER FEES
All title charges are required for all mortgages and are as follows:
Lender's Title insurance
Settlement or closing fee
Endorsements
Recording fees
Courier fee / Overnight
Document preparation
Flood certification
MERS registration
Credit report
Tax Cert Fee
APPRAISAL FEE
A home appraisal (interior and exterior) will determine the value of the property. An FHA appraisal has different parameters than a conventional appraisal. It is required to be done by an FHA-approved appraiser, and the appraisal must meet FHA guidelines.
HECM COUNSELING FEE
It is required that all HECM borrowers obtain HECM counseling and receive a HECM counseling certificate which the borrower/s and counselor will sign. The Reverse Mortgage loan cannot begin without this certificate. The counseling fee of $125 can be waived if the borrower can prove financial hardship. It an also be included in the loan and paid out of the closing proceeds.
SMART BORROWING
In the final analysis, for example, closing costs of $13,000 which are financed, let's say for 15 years, would be $866.00 per year, but naturally since you are not paying any mortgage payments, and interest is accruing on that amount, the amount per year is higher and increases over time. All this is laid out on the amortization table with every reverse mortgage comparison.
In my opinion, the benefits far outweigh the negatives. Where can you get cash out of your home, open up a line of credit that GROWS at exactly the same rate as the interest on the loan and increases the amount of money in the line over time, and make no monthly mortgage payments? Now, if you want to lower the costs over time, you are permitted to make payments to the lender,and whether that's $200 a month or less or more, this will help in the long run.
The HECM Line of Credit
Having an Advantage That Works
The Line of Credit That Doesn't End
Not having to pay any monthly mortgage payments on the HECM is a great advantage. But what's even better is the LOC, Line of Credit. You can draw on your credit line whenever you need to whether to enjoy life more or pay some bills.
The HECM line of credit stays open so the funds are there when you need them. The HECM line of credit grows over time as the unused portion of the line of credit grows at current expected interest rates. So, for example, if you took our the HECM line at age 62 or 65 and left it there for say 10 or 15 years, just think how much would be there at the expected rates of interest.
Now, you don't pay any interest on your HECM line of credit even as it grows, and that is why we don't call it "interest" but a growth rate. If you put the same money in a savings, you would pay interest on that money.
" HECM: Both the reverse mortgage and HELOC will only accrue interest on the money drawn or borrowed. Only the reverse mortgage’s line of credit will allow the unused portion to grow at the same rate the borrower is paying on the used portion of the line. This will give the borrower greater borrowing power." ... advantage -- the credit line growth rate and the fact that the line cannot be closed like a HELOC at the banks discretion."
https://www.mlsreversemortgage.com/news/title-bout-hecm-vs-heloc/
