If you are concerned about having the funds to sustain a comfortable retirement, a reverse mortgage can provide an additional source of funds for financial peace of mind. Overall, it can be a smart means to supplement retirement income — as long as they know what to expect.
Let’s set the record straight by reviewing these eight truths:
1. The bank will not own your home. When a borrower takes out a reverse mortgage, the bank has a lien on their home. That means it has first claim on the proceeds from a sale. But the borrower continues to own the home and live in it as their principal residence. Moving out of the home as their primary residence— whether they’re relocating near family or to a long-term care facility — triggers the loan to become due and payable.
2. Your reverse mortgage allows for more financial control, compared to traditional mortgage products. An adjustable-rate (ARM) Home Equity Conversion Mortgage (HECM) line of credit offers all the benefits of a traditional Home Equity Line of Credit with more flexibility in how the loan is repaid. Plus, the unused portion grows over time — independent of home value. Meaning, if part of your loan is held in a line of credit upon which you may draw, then the unused portion of the line of credit will grow in size each month. The growth rate is equal to the sum of the interest rate plus the annual mortgage insurance premium rate being charged on your loan. This is news worth considering as you can actually add financially to your bottom line.
3. There are obligations that must be met to keep the loan in good standing. Homeowners are responsible for basic upkeep and repairs, and paying homeowners insurance, taxes, homeowners association (HOA) fees and other costs of homeownership. Failing to keep current on these expenses can result in risk of foreclosure.
4. You may make monthly payments — or not. There are no monthly principal and interest payments for reverse mortgages, as long the loan obligations noted above are met. Borrowers can pay back as much or as little as they’d like each month, or nothing at all. There is no pre-payment penalty.
5. There are fees to consider. In addition to an origination fee and closing costs, there’s an upfront Mortgage Insurance Premium (MIP) to ensure non-recourse. There’s also a fee for reverse mortgage counseling by an independent, third-party counselor.
6. If a borrower moves, passes away or sells the home, principal and interest payments are required. When certain life events deem the loan due and payable, borrowers are responsible to pay up. This is generally through the sale
of the property following death. But remember, you can opt to pay down the principal and interest if and when you choose; no pre-payment penalties apply.
7. You can still leave your home to your loved ones. Heirs simply have to pay off the loan balance if they want to keep the property. This includes the amount of funds used plus accrued interest and fees. This is generally done through a refinance of the existing reverse mortgage loan. Heirs can also sell the home to repay the loan and retain any remaining equity after the sale.
8. Eligible Spouses aren’t kicked to the curb. Co-borrowing spouses may remain in the home as their primary residence, and access reverse mortgage funds if they continue to meet the loan obligations. A qualified non-borrowing spouse who meets certain conditions can continue living in the home; however, they will not have access to any additional reverse mortgage funds since they are not a borrower.
Knowledge is power . . . now you have more knowledge!
A reverse mortgage can be an effective financial tool for the right candidate. Don’t hesitate to reach out to Eva Cutler at Covenant Reverse Mortgage so she can help you retire more comfortably