Reverse mortgages... some people think they mean the end of all mortgage payments, others may think that they’re a scam. Some question if it’s even technically a refinance, while others may look at it as a life-saving and “financial freedom” loan.
The Pros of Reverse Mortgages
There are a lot of misconceptions around reverse mortgages and some of it dates back to their early inception when they were underwritten from insurance companies. Understandably, these companies wrote them to their own benefit. They had little oversight, if any at all, and underwriters even went as far as having themselves (or their company) placed on the property title to give them more leverage and control.
Those days are far behind us and reverse mortgages have done a complete 180 since then. Nowadays reverse mortgages are a federally-underwritten and federally-insured mortgage loan that is designed to provide individuals 62 years old or older a method to eliminate house payments for good. With reverse mortgages, the government is not looking to take title to your home. They’re not looking for a reason to put you out of your home nor looking to do anything other than provide an alternative option for a homeowner looking to make changes to their existing mortgage.
Simply put, a reverse mortgage is still a mortgage on a borrower’s property. The biggest differentiator is that a reverse mortgage actually does not require a minimum monthly payment. As such, a borrower could feasibly convert their current mortgage payment and equity position into a loan that frees up cash and still gives them total control over their property and hard-earned equity.
In fact many don’t realize that because it is a reverse mortgage, a payment can be made to offset the interest that accrues on the loan. While it’s not required, it is certainly an option a homeowner has – whether they want to pay anything at all, no matter how large or small, and whether it be consistent are not. It’s this very model that has completely changed the game of reverse mortgages from their early days. Homeowners remain on the title and at any time can call for a payoff. Additionally, homeowners can at any time choose to sell their property.
To be eligible for a reverse mortgage, the requirements are as follows:
- A minimum age of 62 years old or older
- A minimum net disposable income on a monthly basis (which is used to show that the homeowner can still maintain to pay utilities and minor living expenses)
- A typical minimum equity position of 50% to 60% of their home’s value.
In regards to the equity position, that is determined by the minimum age of the youngest borrower who is to remain on title. The younger that borrower is, the higher the required equity position.
Did You Know?
The reason the equity position requirement is at 50% or greater is because a borrower could feasibly live in a property for 20-30 years plus without ever having to make a mortgage payment.
Yes, borrowers are not technically required to make a payment, but are required to keep the home insured and need to pay property taxes when they’re due. With reverse mortgages, the federal government wanted to create a program that was safe and gave homeowners options.
As an added benefit to homeowners, because they remain on the title and are in complete control of their home, they get the benefit of the appreciation that takes place in the housing market. So even without making regular mortgage payments, homeowners can still gain equity on a home that they may not be paying for.
Conversely, if the market is in a freefall or a correction, homeowners are not placed out of their home if the balance surpasses the actual value of the home. So even if a homeowner owes more on their home than the value of the home, they can never be placed out of their home.
Cons of Reverse Mortgages
So you might wonder why everybody wouldn’t want a reverse mortgage after the age of 62... The answer is “it depends” according to individual circumstances. For example, one negative is that reverse mortgages carry more in fees than a standard loan. In addition, all borrowers are required to go through a minimum HUD counseling class to ensure they understand all the ins and outs of a reverse mortgage. Also there are those who still deal in reverse mortgages that put their own interests above those of borrowers.
Is a Reverse Mortgage Good for Me?
A reverse mortgage can be a godsend for someone struggling to make payments, or perhaps for individuals that are spending more on medical expenses than their mortgage. Reverse mortgages can also be beneficial for those that just want to enjoy life without having to pay a mortgage every month which can make a significant impact in their quality of life.
If you still have questions, whether it be for you or a family member that may benefit from a reverse mortgage, please feel free to reach out to one of our personal mortgage advisors who would be happy to spend time answering your questions. Our experts are ready to help you decide if a reverse mortgage is the right choice for you!
