Guidance on Taking a Reverse Mortgage

Aug 24, 2018

The Consumer Financial Protection Bureau has some good information  on its website for homeowners who might be interested in taking out a reverse mortgage loan. But they’re not the right choice for everyone. If a reverse mortgage is something you’re considering, you need to proceed with caution. There are potential pitfalls you need to be aware of and understand. General information is helpful, but everyone’s situation unique.

Consulting with a knowledgeable attorney before taking out a reverse mortgage can help you make the right decision and choose the options that best meet your needs. For example, if you’re married, you need to decide whether to apply jointly with your spouse. You might also have cheaper options, such as refinancing your existing mortgage loan for more than you currently owe or taking out a home equity loan. If you to take out a reverse mortgage, you will  have to choose whether to receive funds through a lump sum payment, a line of credit or a monthly payout.

But let’s start with the basics.

What is a reverse mortgage loan?

A reverse mortgage (also called a Home Equity Conversion Mortgage) is a special type of mortgage loan for homeowners who are at least 62 years old. It allows eligible homeowners to borrow money against the equity in their home (your equity is the difference between the amount you owe on an existing mortgage loan, if any, and the value of your home) and pledge the property as security. But unlike a traditional mortgage, a reverse mortgage does not require monthly payments. In fact, you don’t have to repay the loan until you sell the home or decide to move out. The loan also has to repaid when you die, unless you’re survived by an eligible spouse or a co-borrower (see below).

For some older homeowners, selling their home might be the best option. Some people have large homes and want to downsize. Others may want to move to a different area.

But if you want to stay in your home, taking out a reverse mortgage loan allows you to access the equity without having to sell the property. This can be a good option if you have built up substantial equity in your home, but don’t have enough retirement income or assets to pay your living expenses.

Important issues to keep in mind

  • While there are no monthly payments on a reverse mortgage, you still have to pay real estate taxes, insurance, utilities and maintenance.
  • Each month interest is added to the principal balance of the loan (the interest rate and amount is determined by the loan terms). This added interest increases the loan balance and reduces equity.
  • If you die and are survived by an eligible spouse or co-borrower, they  can continue to live in the home after your death. Co-borrowers can also continue to receive payments from the loan.
  • You could run out of money as you get older if you take out a reverse mortgage too soon. And the older you are, the more money you can
    borrow.

There are a lot issues to consider and a number of options to choose from. If you’re thinking about taking out reverse mortgage, please contact me. I can help you make the right decision.

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