Introduction

What is a reverse mortgage?

In recent years, reverse mortgages have exploded in popularity among American seniors. Since the program began in 1989, over 1 million reverse mortgage loans have been originated. In 2021 alone, over 130,000 seniors took out a reverse mortgage.

But what exactly are reverse mortgage companies, and is it right for you? Everything in this comprehensive guide will leave you with nothing but a reverse mortgage explained. We’ll separate fact from fiction regarding common reverse mortgage rates myth. You’ll learn how they work, their benefits and drawbacks, who they are best suited for, alternatives you may want to consider, and if a reverse mortgage could help you purchase a new home.

Common Misconceptions

Even the best reverse mortgage company can have the biggest misconception about reverse mortgages is that the lender can take your home if you miss a payment or don’t follow the loan guidelines. This is not true. With a reverse mortgage, you retain full ownership of your home as long as you:

• Live in the home as your primary residence
• Pay property taxes and homeowner’s insurance
• Maintain the home and keep it in good repair

Unlike a traditional mortgage, you don’t need to make monthly payments with a reverse mortgage. You cannot default or lose your home to foreclosure if you meet the above obligations. The reverse mortgage lender cannot call due to the loan balance and take your home as long as you live in the home and follow the loan guidelines. Even if the loan balance grows larger than the home value over time, the lender cannot force you to sell or vacate the property. You only have to repay the reverse mortgage after the last borrower moves out of the home permanently or passes away. So, with a reverse mortgage, you retain complete control and ownership of your home during your lifetime as long as you maintain the home and pay taxes and insurance.

How Reverse Mortgages Work

A refinance reverse mortgage is a home loan for older homeowners, typically aged 62 and older. Here’s how they work:

• You receive cash, a line of credit, or monthly payments from the lender based on the equity in your home.
• You still own your home and can live in it for life.
• To qualify, you must live in the home as your primary residence and keep paying property taxes and homeowner’s insurance.
• You are not required to make monthly loan payments. The loan balance grows over time and is repaid when you move, sell the home, or pass away.
• Loan repayment comes from the sale proceeds when the owner sells the home. If there is remaining equity after repaying the loan, it goes to you or your heirs.
• The loan does not need to be repaid until you sell the home or pass away. So you can access cash from your home while still living in it.
• Interest charges accrue on the loan balance and get added to the amount owed each month.

The key benefit is accessing home equity without having monthly loan payments. The tradeoff is the loan balance grows over time as interest accrues.

Reverse Mortgage Home Purchase

Most people do not know you can purchase a home with a reverse mortgage. This unique use case allows buyers to qualify for and purchase a new home under the more flexible guidelines of a reverse mortgage. For retirees or those on a fixed income, this can provide a pathway to homeownership that may not be accessible through a traditional mortgage. Income requirements are less strict with a reverse mortgage, as you only need to verify that you can pay for the home’s taxes, insurance, and upkeep. Additionally, you make no monthly principal or interest payments on a reverse mortgage. This reduces the monthly expenses associated with purchasing a new home. Borrowers only need to pay the taxes and insurance to remain in good standing. This use case provides flexibility for buyers who may be selling their current home and want to purchase a new home. For example, you can take some of the equity from the sale of your existing home and use it as a downpayment on the new reverse mortgage. This allows you to keep some proceeds from the sale as savings instead of putting everything into the new home purchase. In summary, a reverse mortgage can be a unique and helpful tool for retirees or fixed-income buyers to purchase a new home. The relaxed income and credit requirements and the lack of monthly mortgage payments provide a pathway to home ownership that may not be accessible otherwise. Consult with a lender to see if this option makes sense for your financial situation.

The Interest-Only Payment ‘Secret’

What are the reverse mortgage interest rates?

One little-known feature of reverse mortgages is the ability to make interest-only payments. Here’s how it works:

With a typical reverse mortgage, interest accrues on the loan balance each month. And because you don’t make any payments on a reverse mortgage, that interest gets added to the loan balance. This causes the interest to compound, meaning you’re paying interest on interest. Over time, compound interest can significantly increase the amount you owe. However, reverse mortgages allow you to make interest-only payments each month. When you make these payments, you pay just enough to cover the interest accrued that month. This prevents the interest from being added to the loan balance and compounding. By making interest-only payments, you can keep the loan balance steady instead of growing larger each month. This allows you to maintain your home equity over the long term. The key benefit is that interest no longer compounds on a reverse mortgage if you make interest-only payments. This keeps the total interest costs down and prevents your loan balance from ballooning over time. Making interest-only payments can be an effective strategy for borrowers who want to preserve equity or avoid escalating interest costs.

Benefits of a Reverse Mortgage

A reverse mortgage can provide several benefits that make qualifying for and increasing your monthly cash flow easier than a traditional mortgage. Here are some of the key benefits:

• Easier Income Qualifying – With a reverse mortgage, you only need to verify that you have enough income to pay for the home’s taxes, insurance, and maintenance costs. There is no specific income requirement, so it is much easier to qualify based on income compared to a traditional mortgage. This makes it possible to purchase a home even if you are retired or on a fixed income.
• Easier Credit Qualifying – Reverse mortgages do not have any credit score requirements. Suppose you have paid your property taxes and insurance on time for any properties you own over the past two years. In that case, you can qualify for a reverse mortgage regardless of your credit score. This makes purchasing a home much more accessible for those with poor credit.
• Increased Cash Flow – With a traditional mortgage, you must make monthly principal and interest payments. With a reverse mortgage, you can make interest-only payments, resulting in a much lower required monthly payment. This frees up more monthly cash flow than a traditional mortgage payment with entire principal and interest payments. You can use the increased monthly cash flow to supplement retirement income or other expenses.

Drawbacks of a Reverse Mortgage

A reverse mortgage does come with some potential drawbacks that borrowers should consider:

• Interest accrues if no payments are made – With a reverse mortgage, interest accrues on the monthly loan balance. Suppose you make no payments on the loan. In that case, that interest gets added to the balance and compounds, meaning borrowers can end up owing significantly more than the original loan amount over time.
• Closing costs – Reverse mortgages come with closing costs like any other mortgage loan. These can include origination fees, appraisal fees, and additional charges. Closing costs can range from a few thousand dollars to over $10,000. While these can be financed into the loan, it increases the overall costs.
• Loss of equity – Since interest builds up when no payments are made, borrowers and their heirs may have little to no home equity left when the home is sold or the loan comes due. You need to consider this loss of equity over time.
• Loan repayment – Reverse mortgages come due under certain circumstances like the death of the borrowers or if the home is no longer used as the primary residence. This could force the home’s sale to repay the loan, which may concern some borrowers.
• Complex loans – Reverse mortgages are complex financial products, and borrowers may need to understand the terms or implications. Seeking independent advice and closely reviewing all documentation is essential.

While reverse mortgages can benefit some seniors, potential drawbacks like these need to be evaluated to determine if a reverse mortgage is the right option or if alternatives may be better suited for a borrower’s situation. Thorough research and open eyes are critical.

Who Benefits Most from a Reverse Mortgage?

Reverse mortgages can be most beneficial for specific demographics and situations:

• Retirees – Retirees living on a fixed income can benefit from a reverse mortgage. It provides access to home equity without requiring monthly mortgage payments. This helps free up cash flow for retirees to meet living expenses. A reverse mortgage also does not require credit qualification, only that retirees stay current on taxes, insurance, and home maintenance.
• People Looking to Downsize – Seniors looking to downsize to a smaller home or move closer to family can use reverse mortgage proceeds for a down payment on a new home. This allows them to buy a new home even if their retirement income alone would not qualify for a traditional mortgage.
• People Needing Cash for Medical or Living Expenses – A reverse mortgage provides tax-free access to home equity that can pay for medical procedures not covered by insurance, in-home care services, home renovations for aging in place, or everyday living expenses. This can be preferable to high-interest debt solutions.
• People Seeking an Alternative to Selling Their Home – For those who want to remain in their home long-term but need access to equity, a reverse mortgage offers cash flow without selling the home and relocating. This helps avoid capital gains taxes and costs of buying a new home.

In summary, reverse mortgages offer unique benefits for retirees, seniors looking to downsize, and people needing tax-free cash for expenses while remaining in their homes. The pros and cons should be weighed carefully based on each individual’s financial situation and goals.

Alternatives to a Reverse Mortgage

• Downsizing and selling your current home – This is an obvious alternative if you own a larger, more expensive home that no longer suits your needs. Selling it and downsizing to a smaller, more affordable home, perhaps closer to family, could be wise. You can take the proceeds from the larger home sale, use some as a downpayment on the new place, and keep the rest for savings. The only caveat is that you’ll need to prove you have enough regular income to qualify for a traditional mortgage on the new home.
• Take out a home equity loan – If you have sufficient equity in your current home, you may qualify for a home equity loan or line of credit. This lets you tap your home’s equity while keeping your first mortgage intact. It can provide funds for home repairs, medical bills, or other expenses. The downside is it functions more like a traditional loan – you’ll have required monthly payments for a set number of years to pay it back.
• Rent out a room in your home – For supplemental income, you could rent an extra room to a tenant or boarder. Screen tenants carefully, draft a rental agreement protecting yourself, and report the rental income on your taxes. This additional monthly income could help cover expenses to stay in your home.
• Part-time work – Consider taking on a part-time job if possible as you get older. Even a couple of days a week of work can provide the extra funds needed to stay in your home. Talk to your financial advisor about how working could impact social security or pension benefits.
• Ask family for help – If your adult children are financially able to, consider asking them for help with expenses so you can stay in your home. Offer to pay them back through your estate/will or structure it like a family loan. Some families are in a position to help older parents in this way.

Conclusion

In summary, reverse mortgages can be an excellent financial tool for some seniors, but they are only suitable for some. The key is understanding how they work so you can make an informed decision.

• Reverse mortgages allow homeowners 62 and older to access their home equity as tax-free income. You retain ownership of your home.
• You don’t have to make monthly mortgage payments with a reverse mortgage. The loan is repaid when you pass away or move out.
• Interest accrues on the loan balance, which means it can grow over time. You eliminate this growth by making interest-only payments.
• Reverse mortgages can purchase a new home through specific programs. This helps seniors who want to downsize but have limited income.
• Benefits include easier qualifying, flexible payments, and accessing home equity without selling your home. Drawbacks are closing costs, non-recoverable upfront premiums, and potential equity loss over time.
• Reverse mortgages are best suited for cash-poor, house-rich seniors who want to age in place. They are not suitable for seniors who may need to move soon.
• Alternatives to explore include downsizing, traditional mortgages, equity loans, and home renovation loans.

Is a reverse mortgage a good idea? The answer is straightforward: a reverse mortgage may help provide tax-free income in retirement.

Contact a loan officer today to discuss your situation.