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Reverse Mortgages: What are they and are they right for you?

05-24-2022About MortgagesEddie Knoell

In this post, we’re talking about reverse mortgages. We’re going to go over the requirements for reverse mortgages, the pros and cons, and we’ll cover some common myths and clear up some understandings that some people commonly have about them.

What is a reverse mortgage?

A reverse mortgage is a loan that allows homeowners who are over 62, or older, to borrow some of their home’s equity as tax-free income, given that they’ve already paid off their mortgage. Essentially, it’s the opposite of a normal mortgage. So, instead of paying your loan down, you’re allowing the bank to upsize your mortgage over the years.

What types of properties are eligible for a reverse mortgage?

Eligible properties include:

  • single family residences,
  • townhomes,
  • condos, and
  • manufactured homes.

What are the requirements for a reverse mortgage?

  • You must be 62 years or older.

  • You must live in it as your primary residence.

  • You must keep current on your property taxes and insurance.

  • You must keep the home properly maintained.

  • All borrowers must complete a HUD Counseling class and receive a certificate of completion before a bank can start the application process.

To be eligible for a reverse mortgage on your property you have to be at least 62 years old and you have to live in the property as your primary residence. You can’t take a reverse mortgage out on an investment property.

You also have to keep current on your taxes and insurance because those taxes can be a property lean. Say, your home burns down, the bank needs to be able to replace that home and rebuild it. This is why insurance and keeping your home in average to good condition is important.

All reverse mortgage borrowers must also complete the HUD (Department of Housing and Urban Development) counseling class that will give them a certificate of compilation. This is because 90% of all reverse mortgages are FHA secured, which is through the HUD department. Government insurance requires everybody, even before the start the application process for a reverse mortgage, to take these classes.

Do both spouses have to be 62 years old to be eligible?

No.

If only one person is 62 years old you will still be able to take out a reverse mortgage; however, it will solely be in the name of the person who is 62 or older. The spouse under 62 will need to sign a disclaimer deed at the time of closing and they will be considered a non-borrowing spouse, i.e., someone who is not on the note or deed.

Pros and cons of a reverse mortgage

Pros:

  • There is no mortgage payment.

  • It is a no recourse loan.

  • The credit line grows at a predetermined set rate.

  • The Fees can be financed into the loan.

First of all, one of the biggest pros is that there’s no mortgage payment. It’s also a no recourse loan. This is a huge deal, especially in a market with prices as high as the current one. Being a no recourse loan means that the bank cannot come after you or your heirs if the collateral in the future doesn't cover the payoff balance.

You can also have a line of credit that you build into the loan. The credit line for reverse mortgages grows at a predetermined and set rate, which helps you to calculate what the future equity will be in your home. It also protects both the borrower from future home depreciation. If you draw money from the credit line you can also pay back into it to be able to draw on it later. You’re not limited to a one time withdrawal. You can withdraw and pay it back, just like a regular line of credit.

Fees can also be financed into the loan. So, basically you can get the reverse mortgage without the burden of upfront costs. There are closing costs but there is no cash to close, which is a huge deal.

Cons:

  • Fees are higher than typical conventional loans.

  • A Reverse Mortgage is not a short term loan (due to the higher costs)

Now, the first point is obvious — the fees are higher than that on a conventional loan. Because of this, reverse mortgages are not a great short term loan. You can refinance it in the short term if you need to, but we wouldn’t go into a reverse mortgagee with that in mind. A borrower should not have the intention of paying it off, or selling the house, within a couple of years.

The truth behind reverse mortgage myths

I heard the bank can take my home away from me!

This isn’t true.

You and your family estate will hold title and 100% ownership of the home. The bank is simply putting a lien on your property just like they would on any other mortgage. It can also be refinanced, and you can sell it if you like. In the case of selling, all that would happen is the bank would want to get their loan back. They don’t own the house.

My heirs will be responsible for repaying the loan.

Not True!

If you die, your heirs will have 12 months to sell your home. If they don’t then the bank will have the right to sell your house. If the bank sells it for more than what the mortgage payoff is then your heirs will receive the excess proceeds. If the sale price is less than the owed balance, then the bank would not be able to collect any losses from your heirs because this is a non-recourse loan and it protects your heirs.

The bank will kick out my spouse if I pass away.

Not True!

If there is a surviving non-borrowing spouse on title that was disclosed in the underwriting process, the surviving spouse can continue to remain in the home and receive the benefits of the reverse mortgage without having to sell the home or pay off the mortgage.

Someone told me that I won’t be able to sell my house.

Not True!

When you have a reverse mortgage you can sell your home anytime. Remember, when you have a reverse mortgage you retain 100% ownership of your home, so you can decide to sell at any time. If you do, your reverse mortgage would be paid off at the closing as you would for any other mortgage.

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We hoped this helped you develop a deeper understanding of reverse mortgages. If you have questions about this or anything else, don’t hesitate to reach out.

You can give us a call at 602-535-2171 or shoot us an email at team@AZmortgagebrothers.com. Be sure to ask us for a free quote on your next mortgage. We'll be sure to give you personalized service and help you through the whole process.

Signature Home Loans LLC does not provide tax legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax legal and accounting advisors before engaging in any transaction signature Home Loans NMLS 1007154 And what's number 210917 and 1618695 equal housing lender.

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