Owners aged 62 and older may be eligible for a reverse mortgage for improvement projects or other plans, but they come at a cost.
NEW YORK — Homeownership is a dream for millions of people across the globe. The National Association of Realtors® indicates real estate has historically exhibited long-term stable growth in value. Money spent on rent is money that a person will never see again. However, paying a traditional mortgage every month enables homeowners to build equity and can be a means to securing one’s financial future.
Homeowners typically can lean on the value of their homes should they need money for improvement projects or other plans. Reverse mortgages are one way to do just that.
Who is eligible for a reverse mortgage?
People near retirement age are eligible for a specific type of loan they can borrow against. Known as a “reverse mortgage,” this type of loan can be great for people 62 or older who perhaps can no longer make payments on their home or require a sum of money to use right now, without wanting to sell their home.
In addition to meeting the age requirement, a borrower must live at the property as a primary residence and certify occupancy annually to be eligible for a reverse mortgage. Also, the property must be maintained in the same condition as when the reverse mortgage was obtained, says Fannie Mae.
How does a reverse mortgage work?
The Consumer Finance Protection Bureau says a reverse mortgage, commonly a Home Equity Conversion Mortgage, which is the most popular type of reverse mortgage loan, is different from a traditional mortgage. Instead of making monthly payments to bring down the amount owed on the loan, a reverse mortgage features no monthly payments. Rather, interest and fees are added to the loan balance each month and the balance grows. The loan is repaid when the borrower no longer lives in the home.
What else should I know?
With a reverse mortgage, even though borrowers are not making monthly mortgage payments, they are still responsible for paying property-related expenses on time, including, real estate and property taxes, insurance premiums, HOA fees and utilities. Reverse mortgages also come with additional costs, including origination fees and mortgage insurance up to 2.5% of the home’s appraised value, says Forbes. It’s important to note that most interest rates on these loans are variable, meaning they can rise over time and thus increase the cost of borrowing. In addition, unlike traditional mortgage payments, interest payments on reverse mortgages aren’t tax-deductible.
How is a reverse mortgage paid back?
A reverse mortgage is not free money. The homeowners or their heirs will eventually have to pay back the loan when the borrowers no longer live at the property. This is usually achieved by selling the home.
The CFPB notes if a reverse mortgage loan balance is less than the amount the home is sold for, then the borrower keeps the difference. If the loan balance is more than the amount the home sells for at the appraised value, one can pay off the loan by selling the home for at least 95% of the home’s appraised value, known as the 95% rule. The money from the sale will go toward the outstanding loan balance and any remaining balance on the loan is paid for by mortgage insurance, which the borrower has been paying for the duration of the loan.
Reverse mortgages can be a consideration for older adults. However, it is essential to get all of the facts to make an informed decision.
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