When and How Can a Reverse Mortgage Go ‘Reverse’? – A Brief Analysis
From the growing number of applications filed in the recent years, we can clearly understand the popularity of reverse mortgages amongst the senior citizens. For senior homeowners who are 62 and above, reverse mortgage has become the most viable option as compared to the last and probably only resort of selling their homes in a dire financial crisis.
Reverse mortgage or the Home Equity Conversion Mortgage (HECM) is preferred by the senior homeowners primarily because:
- It allows you to keep your home instead of selling it. You can choose to live in your home till you move out, sell it or die.
- It does not involve any repayment. Instead, you are paid by your lender on a monthly, annual or lump sum basis.
- Your payments from the lender are usually interest-free.
- You can use reverse mortgage payments in various personal financial needs like household expenses, medical and prescription drug expenses, credit card debts etc.
In addition to the major reasons outlined above, reverse mortgage loans stand out to be most advantageous amongst other regular loans and mortgage options. The advantage is especially for senior citizens with an age of 62 or more who have substantial access to their home equity built up over the years.
Although reverse mortgage or HECM might seem extraordinarily attractive and the most favored option for senior homeowners, a word of caution exists. Reverse mortgage is not for everyone! Apart from eligibility issues like being 62 or above and owning a home, there are certain factors that need to be considered to decide if reverse mortgage is best for you. Let us elaborate this a little.
Let us face it - no one is certain or able to predict about his/her death. But it is the nature’s law that you near death with age. Reverse mortgage lenders play a virtual ‘gamble’ with this fact of life. In this game, the longer you live as a reverse mortgage client, the more you benefit. But the problem is you cannot say for sure that you’ll live longer. You can however, make your decision basing on the theory of probability.
Reverse mortgages are calculated and provided primarily basing on your home’s equity. Provided you have built complete equity of your home (i.e. paid off all your mortgage loans and fees) and decided to spend the rest of your life at your home, becoming a reverse loan client at the earliest would offer you significant dividends. On the other hand, if you purchased your home recently and your home equity is relatively small, it is better to wait and apply later in order to allow the equity to build. It makes no sense of getting a $500 monthly payment out of your home equity, does it?
If you are considering a reverse mortgage loan, refrain from those thoughts of selling your home for at least 3 to 5 years. In ideal (and most) scenarios, selling your home while under a reverse mortgage would not give you more than few dollars.
Another important aspect to consider is your plan of moving out of your home. Moving out of your owned home (the one which was reviewed for the loan) terminates the reverse mortgage contract and calculations of cost difference, closing costs and others come into play. Therefore, to gain true benefits from a reverse mortgage you need to live at your home for a considerable period, at least five years or more.
If you have been living in your home for three decades or more, chances are, your home equity has grown 100% already. In such a case, if your retirement benefits are well enough to meet daily needs, consider tapping a lower percentage of the equity when applying for reverse mortgage. It will enable you to get a good conversion payment while retaining most of the home’s equity.
Again, if you have your child’s property inheritance in mind, a reverse mortgage can be of no or insignificant benefits. Your monthly payments from reverse mortgage will continue to pile only to be deducted from the remaining home equity (if any) after your death. If the difference in your favor your successors will gain some benefits. If the difference is negative, they will be entirely deprived of your property’s inheritance.
To benefit from reverse mortgage, make sure you calculate the fees, closing costs etc. to find out how much advantageous it can be. Consult with a reputed mortgage consultant before you move forward or make a leap in your financial life.
