A Reverse Mortgage
The Superbowl carried ads for reverse mortgages that focused mainly on aging boomers and their finances. They talk about peace of mind. Someone said the reverse mortgage is the last thing that boomers would ever want, and they are the first thing they need as a last resort. What is a reverse mortgage?
A Reverse Mortgage
A reverse mortgage is a mortgage loan, usually secured by a residential property, that enables the borrower to access the unencumbered value of the property. The loans are typically promoted to older homeowners and do not require monthly mortgage payments. Borrowers are still responsible for property taxes or homeowner’s insurance. Reverse mortgages allow elders to access the home equity they have built up in their homes now and defer payment of the loan until they die, sell, or move out of the house. Because there are no required mortgage payments on a reverse mortgage, the interest is added to the loan balance each month.
The rising loan balance can eventually exceed the home’s value, particularly in times of declining home values or if the borrower continues to live in the house for many years. However, the borrower (or the borrower’s estate) is generally not required to repay any additional loan balance in excess of the home’s value.
The leading players involved in the global reverse mortgage market:
American Advisors Group (AAG)
Finance of America Reverse (FAR)
Reverse Mortgage Funding (RMF)
Liberty Home Equity Solutions (Ocwen)
One Reverse Mortgage (Quicken Loans)
Mutual of Omaha Mortgage
HighTechLending
Fairway Independent Mortgage Corporation
Open Mortgage I
Longbridge Financial
The National Foundation for Credit Counseling® (NFCC) reported in a March 2014 survey that 71% of Americans are worried about their financial One consequence of worrying about making ends meet has been an increase in Americans over 62 taking out reverse mortgages.
Pros and Cons of a Reverse Mortgage
It’s easy to Google and find the Pros for reverse mortgages, but not as easy to get the cons. The Pros can be listed as:
- You can stay in your own home and improve your finances, assuming you have equity in your home.
- It’s flexible. It can be tailored to your financial needs or financial planner’s recommendations
- Low risk of default. However, it would help if you kept up with property taxes, upkeep, and insurance.
- The money you take out is tax-free.
- The mortgage cannot exceed the value of your home.
- No restriction on how you use the funds extracted.
The Cons can be listed as:
- The mortgage rate is adjustable. Adjustable-rate loans can be expensive if rates go up.
- There are high origination fees.
- There are no monthly payments, but the size of the mortgage compounds.
- The interest is not deductible
- The home will have to be sold when the mortgagees die.
- There may be no equity left for your heirs.
- The homeowner may get locked into keeping the house when a better option would be to sell and move into more affordable housing.
- The homeowner may not keep up with property taxes, upkeep, and insurance.
Should You Consider Using a Reverse Mortgage?
The National Foundation for Credit Counseling® (NFCC) reported in a March 2014 survey that 71% of Americans are worried about their financial One consequence of worrying about making ends meet has been an increase in Americans over 62 taking out reverse mortgages.
A reverse mortgage is certainly a viable option for some older Americans, especially if you do not consider moving. Others believe that a reverse mortgage is a little like a car airbag. It’s nice to know it’s there. But if it ever has to be used, the driver’s already in trouble.
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