Reverse Mortgage Fees Dropped at Big Banks
While a reverse mortgage sounds like a good deal -- you get to stay in your home and tap your equity, rather than selling your home to get at your nest egg -- there are some things you should consider when deciding whether this is the right move for you.
If you are 62 years old or older, and have either paid off your mortgage or have a large amount of equity in your home, you can consider a reverse mortgage. But first, understand that these loans are not one-size-fits-all.
Depending on your current financial situation and the value of your home, this could be a great way to help fund retirement, or a path to more debt.
It's also important to know that, while you are tapping the equity in your home, a reverse mortgage is very different from a home equity loan or line of credit. When you obtain a reverse mortgage, you are, in effect, selling your home to the bank for a certain amount, which is based on the assessed value of your home, and the amount of equity you have in it.
You can receive payments based on that value in several ways, including a lump sum, monthly payments, a line of credit or some combination of these options.
So, what are the questions you need to ask yourself and your lender before you sign on the dotted line?
How long do I plan to stay in my home?
The benefits of this loan are only apparent if you are planning to stay in your home for several years; the longer you are there, the more beneficial the loan is. So, if you know you want to head to warmer climes, or be near the grandchildren in a few years, or you are not sure this neighborhood is for you, then don't do it.
How much debt do I have?
If you have are drowning in debt, this might not be you best bet for cleaning up your balance sheet. You are tapping equity, after all, and if that equity will not cover your debt, or, if you will be tapped out once you do, you could end up back where you started, only this time, with absolutely no equity. While many lenders have eliminated origination fees, there are still other fees to consider, including a mortgage insurance premium. (Fees are 2 percent of the home's value upfront and a monthly premium equal to 0.5 percent of the mortgage balance.) And remember, you need to be able to continue paying taxes and insurance on the property. The bank is not responsible for those, as often happens with a regular mortgage.
Have you promised anyone the house after you die? This is a loan, and one that needs to be repaid once you leave the home. If a family member wants possession of the home after you move out, they would first have to pay the entire amount of the loan. Depending on the value of the home at the time of the sale, they might be paying a lot more for the home than they planned. If selling your home to your children is a plan, it might make more sense to have them purchase it sooner rather than later.
Do you participate in any state or federal programs for which you receive financial aid?
Receiving funds from a reverse mortgage could make you ineligible for government programs. Be sure to check limits on funds you are able to receive from other sources to ensure that you do not lose benefits.
The best advice: Do the numbers. There are calculators online, such as this one on the AARP's website, that will help you figure out if this is the right move for you.
And then sit down with a financial expert and do the numbers again. If you apply for a reverse mortgage through the Home Equity Conversion Mortgage Program, or HECM (which is administered through HUD) you are required to receive counseling.
That's a good thing. Your home could be your biggest asset. You don't want to lose all the equity you've built by making a wrong decision.
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