Characterizing reverse mortgages as “misunderstood,” a new article that aims to answer five key questions for potential borrowers before making a decision about engaging in a reverse mortgage transaction has been published by Yahoo Finance, and authored by personal finance publication MoneyWise.
“You keep title to your home. The bank collects on the loan when you die, sell the house, stop living there, fail to pay property taxes or homeowners insurance, or stop taking care of the place,” writes MoneyWise’s Doug Whiteman in describing some of the specifics of reverse mortgages.
The five questions the article answers for borrowers are:
Why do a reverse mortgage?
Describing a reverse mortgage as something that can, “can be a great way to secure extra money to use as you see fit,” the answer to this question also includes details on the non-recourse feature built in to the government-insured Home Equity Conversion Mortgage (HECM), and specific use cases including covering certain expenses, paying medical bills, completing home projects or paying off an existing mortgage.
Who’s eligible for a reverse mortgage?
This offers information on the minimum age requirement of 62 years, along with the necessity to for a potential borrower to either own their home outright or to have a relatively low mortgage balance.
“You must be confident you can afford maintenance on your home and other costs, including insurance and any homeowners association fees,” the answer reads, before advising the hypothetical borrower that they should plan on living in the property they’re borrowing against in perpetuity.
“If you’re absent for longer than 12 months, the bank is allowed to collect on the loan,” the article says.
How does a reverse mortgage work?
First describing that reverse mortgages can come with either fixed rates or adjustable rates, the article also explains some of the basic differences between the two.
“While a fixed-rate reverse mortgage loan is paid in a lump sum, retirees who choose the adjustable-rate option have the option of receiving monthly payments, a line of credit, a lump sum or a combination,” the article reads. The older the borrower and the higher the value of the home, the more loan proceeds a borrower could potentially have access to, it says. It also describes the 2019 HECM lending limit of $726,525.
What are the downsides?
“Many financial advisers will tell you it’s better to exhaust all other financial means before applying for a reverse mortgage,” this answer begins. Because of this, options a potential borrower may be able to explore before engaging in a reverse mortgage transaction – depending on their financial situation – include minimizing living expenses or liquidating an existing portfolio.
For those who either do, or cannot do those things and still maintain a need for additional funds, “a reverse mortgage may be the best option,” the article says.
How do I decide?
To answer this question, trusted advisors are encouraged to enter the conversation to help a potential borrower to make up their mind.
“It’s always a good idea to get a second opinion,” the article reads. “Bring younger family members into the decision-making [process] to ensure that all the nuances of the agreement are fully understood.”
Read the full article at Yahoo Finance.