Reverse Mortgage – What’s the catch?
A reverse mortgage is one of the many options available to seniors who are 62+ in either buying a home or staying in their home. By understanding the key product features of a reverse mortgage and risks associated with it, you will make an educated decision.
To begin, a few of the strong appeals in getting a reverse mortgage are:
Using Reverse Mortgage to Purchase a Home Benefits:
- No monthly mortgage payments during your lifetime in your primary residence.
- Significantly increase your monthy cash flow
- Flexibility to buy the home that you really want
- Allows you to keep more assets/cash to use as you wish
After getting excited about the benefits of a reverse mortgage, the next question is : What’s the catch?
Reverse Mortgage Loan Costs and Fees
FHA Mortgage Insurance
A reverse mortgage is an insured product that is widely available. However, if a borrower defaults on this type of a loan, FHA has to make good on the loan to the lenders who are marketing this. The cost of mortgage insurance is borne by every reverse mortgage borrower.
At this writing, the mortgage insurance is —-% of the loan amount which is added to the loan balance upfront. In addition, the reverse mortgage borrower pays an annual mortgage insurance of —-% as long they have the reverse mortgage. This is added on to the principal and accrued interest which compounds.
Comparing this with other mortgages such as FHA loans with 3.5% down payment (available to all ages), FHA charges —- upfront and an annual mortgage insurance of —-%. So the mortgage insurance is slightly higher than other FHA loan products.
The key advantage of a reverse mortgage over all other types of mortgages available is that you never have to pay a mortgage payment in your lifetime as long as you live in the home. Like any other mortgage however, you agree to pay a loan interest rate on what you borrow. Since you are not making a single mortgage payment, all the interest and fees (i.e. mortgage insurance premium) are tacked on the loan month after month. So rather than a loan balance that stays the same (interest only payment loans), or a loan balance that decreases over time and ultimately gets paid off (i.e. 30 year fixed mortgage), a reverse mortgage balance increases over time.
In a reverse mortgage, the consolation is that the homeowner nor the heirs will not have to pay more than the current value of the home.
The homeowner does not make mortgage payments at all but must still pay other home related expenses.
In a reverse mortgage, the homeowner must pay property taxes, home insurance, any homeowner association fees (HOA), and property maintenance separately. If the homeowner has no monthly cashflow to pay for these items, the homeowners risk defaulting on the terms of the reverse mortgage.
A reverse mortgage is secured by the home
If a homeowner is unable to meet the contractual obligations of the loan (i.e. making timely payments to property taxes and insurance, etc), then the homeowner risks foreclosure.
The homeowner must live in the home as primary residence
The collateral for a reverse mortgage is the senior’s home. The must be a primary residence and not a second home or vacation/rental property. If the homeowner ceases to occupy the home as a primary residence, the reverse mortgage loan becomes due.
A Home Equity Mortgage is a home-secured debt payable upon default or a maturity event.
Available only to 62+ borrowers
If you are 62 years old and your spouse is under 62, you are age eligible to apply for a reverse mortgage (along with financial qualification), however your spouse or partner would become a non-borrower.