A reverse mortgage is a financial product that allows homeowners over the age of 62 to access the equity they have built up in their homes in the form of cash. The advantages are very desirable: You don't have to worry about making loan payments, you keep your house, and you can use the money you get for whatever you like. If you live an exceptionally long life, there is a chance that you will end up ahead of the game. It's possible that reverse mortgages are the right choice for some borrowers, but that doesn't mean that everyone should get one. It's possible for a reverse mortgage to become a living nightmare for you and your loved ones if you and your plans don't fit the right profile for one. These loans have developed over time to become simpler and more user-friendly, but despite these improvements, they continue to be expensive. It is imperative that you consider all of your options and make certain that a reverse mortgage is the best choice for your circumstances before you commit to getting one.
Rule Out Reverse Mortgage Alternatives
It could be to your advantage to put off applying for a reverse mortgage for as long as possible, depending on the state of the housing market in your area. In the future, you may have a greater amount of equity to use as collateral for a loan if you assume property values will continue to increase, and interest rates remain stable (although this is not guaranteed). The following strategies can assist you in delaying the need to borrow money or in completely avoiding the need for a reverse mortgage. Because getting out of a reverse mortgage is not a simple process, you need to be absolutely certain that you are making the best decision possible. It's possible that you have access to other choices, and even if you don't, you can keep the option of a reverse mortgage on the table for the future.Downsize
There are a few different avenues you can pursue in order to turn the substantial equity in your home into cash. Selling your property is one choice you have available to you. When they reach the age of 62, some homeowners are ready to throw in the towel on the responsibilities and costs associated with maintaining a large home. You might be able to raise additional funds and simplify your life by downsizing. When you sell your current home, you should be able to free up some cash for use in either purchasing a less expensive home or beginning the renting process.Sell to Your Relatives
If you aren't quite ready to leave your current residence just yet, you might be able to sell it to a member of your own family who is interested in purchasing it. If everything goes according to plan, you might even be able to continue living in the home while continuing to pay rent to the relative for the rest of your life. When you pass away, the property you own will become vacant, and the new owner will have complete control over what they do with it. These transactions are difficult to complete, but a competent attorney and tax consultant can easily handle everything on your behalf. Possibly the most difficult aspect is going to be managing the expectations and relationships with the members of your family.A Traditional Type of Loan Called a "Forward" Loan
Is it possible for you to obtain a home equity loan, which is a more conventional option, rather than getting a reverse mortgage? You will need to have a sufficient income in order to qualify, but if you are able to implement this strategy, you will have additional options and possibly even less debt. Analyze the total amount that will be spent on interest as well as the costs associated with closing, and consider whether or not the additional flexibility that comes with a standard loan is worth it.Make More Money
Even though you are retired, are there any jobs that you would be willing to do and able to do in order to make ends meet? You'll have a lot more money in your pocket, and working can keep your mind active. Having said that, make sure to monitor any potential effects on your taxes, Social Security, and any other benefits you receive. Put some thought into it, and see if you can come up with an original answer that fits your situation perfectly. Before moving forward with anything, it is highly recommended that you consult with both financial advisors and debt counselors to gain additional insight.Home for Life
When both you and a co-borrowing spouse (in the case that you are married) intend to spend the rest of your lives in the same house, a reverse mortgage can be an excellent financial tool for you. The expectation is that either somebody will sell the property after your passing or that your heirs will have significant assets to pay off the loan when it comes due (assuming they want to keep the property). When the last person who has a reverse mortgage passes away or "permanently" moves out of the home, the mortgage needs to be paid off. In the event that you make a temporary move to another location, such as assisted living, and that move lasts for more than a year, you may be able to satisfy that requirement. If things go from bad to worse, a spouse or partner who is not listed as a co-borrower on loan may be required to find new living arrangements. The same is true if you have children or other dependents living in your home with you, which can be very upsetting and disruptive. Even if you end up borrowing more than the home is currently worth, your heirs should not be responsible for paying more than the home's appraised value or market value if you use an FHA-insured HECM reverse mortgage. This is the case even if you borrow more than the home is currently worth. If you want to avoid problems, you should make a plan for the future. This plan could involve alternative housing for survivors or a life insurance policy that can pay off the loan and help everyone stay in their home.Maintain Your Equity?
What should you do if you intend to downsize your living space or relocate your family after taking out a loan? It is possible to do so, albeit at the expense of possible complexity. Because reverse mortgages consume some of the equity in your home, the remaining equity will have less value. When you sell your current home, you will be required to pay off the balance of the reverse mortgage using either cash you already have on hand or the proceeds from the sale of your home. If you had a sufficient amount of cash on hand, you probably wouldn't have needed to get a reverse mortgage in the first place. If you use a reverse mortgage to pay off your current mortgage, you may have less money available for the purchase of your next home. Be frugal with your money if you have the remotest possibility that you will leave the house before you pass away. If you borrow less money, you'll have more equity in your current home to put toward the purchase of a new one. Obviously, there is a risk that this strategy will fail: It is possible to repay less than you've borrowed with a reverse mortgage; however, there are circumstances in which it would be more beneficial to borrow more money.Keep abreast of current events.
When you own a home, you're always responsible for its upkeep and associated costs. When you have an existing reverse mortgage, you need to pay extra attention to detail. 1 If you are unable to keep up with your regular responsibilities and expenses, your loan could reach its maturity, which would require you to repay the full amount that you borrowed or put your home at risk of foreclosure. A reverse mortgage uses the equity in your home as collateral, which shields the lender from any potential losses. As a consequence of this, the lender needs to ensure that the home is worth the maximum amount possible. Even though a leaking roof might not bother you, the fact that your home has mold and rotting boards could be a problem for the next person who buys it and has it inspected. You also need to keep up with the payments for your HOA dues and property taxes. Even if your home is damaged or destroyed, it must be rebuilt so that it can be sold for enough money to pay off the loan that was taken out on it. This is one of the requirements that lenders place on borrowers. If you have a habit of letting things slide, you need to figure out how to keep up with the required expenses and maintenance items set forth by your lender. Maintaining a maintenance budget will ensure that you have the funds available to pay for necessary repairs. You can simplify your life and reduce the number of things you need to keep track of by setting up electronic bill payments for your insurance premiums and property taxes.Minimize Interest Costs
When you borrow money, you are responsible for paying interest, which is an expense that, in most cases, cannot be recouped when the asset is sold. Therefore, it is a good idea to keep those costs to a minimum, or at the very least, to ensure that you are getting your money's worth.To Invest, or Not to Invest
In order to obtain a reverse mortgage, you will be required to pay closing costs. You will need to make a decision regarding whether you will pay these costs out of pocket or finance them by adding the costs to the balance of your loan. Financing is attractive due to the fact that you do not have to hand over the money when you borrow it; however, the cost of financing is going to be higher in the long run. Because those fees are included in the loan, you will be responsible for paying interest on the additional amount every year. Today, paying out of pocket causes more discomfort, but it typically results in better financial outcomes.Do You Have a Credit Line?
You also have several choices available to you regarding the manner in which you can obtain the funds from your reverse mortgage. One of the choices available to you is to receive all of the money in a single sum as quickly as you possibly can. You also have the choice of using your reverse mortgage as a line of credit, from which you can withdraw only the funds that you require at the time they are required. Because it will take you longer to pay off the money you borrow with a line of credit, you will pay less interest overall. You take out smaller loans over a longer period of time so that you don't begin with an enormous loan balance and the accompanying interest charges on day one. If, for instance, you plan to use the money from your reverse mortgage to supplement your monthly living expenses by a few hundred dollars, you can stretch out the payment of the money you borrow over a number of years. In addition to this, if you use a line of credit, your available sum of money has the potential to increase over the course of time. You should be aware of at least one potential detriment associated with the line of credit, which is the following: If you decide to go with the line of credit option for your reverse mortgage, the interest rate that you are charged will be variable. This isn't necessarily a bad thing, but there are some circumstances in which the fixed rate lump sum might be preferable.Avoid Hucksters
When used appropriately, reverse mortgages are highly effective financial tools that can be of great assistance to borrowers in a variety of circumstances. The unfortunate reality is that they are also abused. If someone suggests that you use a reverse mortgage to buy something that they are selling, such as annuities, long-term care insurance, or timeshares, you should investigate their interests and seek advice from a different source if you suspect that they have a bias. Con artists and salespeople who are looking for additional income often target homeowners because the equity in their homes typically represents a large sum of money. If you invest the money from your reverse mortgage, you will need to make enough money back to cover the costs of the reverse mortgage just to break even. In addition to this, if you are unable to keep up with the expenses of taxes and maintenance on your home, you are putting it at risk of being foreclosed upon.Counseling should be taken very seriously
In order to participate in the FHA HECM program, you will be required to undergo an obligatory counseling session with a counselor who has been approved by HUD. This is not just a barrier that needs to be overcome; rather, it is an opportunity to gain insight into what you will be getting yourself into. Ask as many questions as you feel compelled to, and go over the figures and quotes provided by the lender with your counselor.Talk About It With Your Family
Although your family and others may be impacted in some way by the choices you make, it is ultimately your home and your money. They care about you and want you to be happy, but they may also have certain expectations regarding the house and whether or not you keep it for yourself. You should let them know if their expectations are unreasonable, or you could work together to find ways to satisfy your requirements while also assisting your family in achieving their objectives. You do not want your heirs to make the assumption that the family will be able to keep the home simply because you plan to continue living there until the day you die. It is possible that members of the family do not realize that they will need to contribute a significant amount of money in order to keep the house. The majority of the heirs will not have enough cash on hand; therefore, they will be forced to either sell the home or refinance the loan. Informing them of this as soon as possible is in their best interest because it will allow them to better manage their credit and any other loans they have, which will increase the likelihood that they will be approved for the refinance loan.