A reverse mortgage is a complex financial product that comes with a lot of necessary considerations for anyone who is contemplating getting such a loan, and these include potential benefits as well as risks that a prospective borrower should keep in mind. This is according to a new reverse mortgage overview column by mortgage reporter Laura Grace Tarpley at Business Insider.
“A reverse mortgage is not the same thing as a home equity loan or a home equity line of credit. All three are tools for tapping into your home equity, but they operate differently,” Tarpley writes. “Each of these three options has its pros and cons, but you’ll want to go with either a home equity loan or a HELOC if you’re under age 62, because unlike a reverse mortgage, they don’t have age restrictions.”
Reverse mortgages offer borrowers several options for accessing their loan’s proceeds, including receiving the full amount in a lump sum; equal monthly payments; or borrowing money as needed through a line of credit. If you meet the age requirements for the most common type of reverse mortgage – the government-sponsored Home Equity Conversion Mortgage (HECM) – you then have to decide what kind of reverse mortgage to actually get.
A HECM has a $765,600 lending limit in 2020, requires meeting with a government-approved counselor before proceeding to loan closing, and can come with higher upfront fees, Tarpley says.
“You’ll pay more in upfront costs with a HECM than with other types of reverse mortgages, but you can use the money for anything,” she says.
You can also look into proprietary reverse mortgages if your home has a higher value than the HECM lending limit, and requires proceeding through a private lender with no government-backing for the product. There is also the “single-purpose” reverse mortgage designed for a single purpose like funding home renovations, and is mostly reserved for those with lesser means.
“This is the most affordable type of reverse mortgage, so it’s probably best for people with low-to-moderate incomes or who haven’t built as much equity in their home yet,” she says. “You’ll get a single-purpose reverse mortgage from a nonprofit organization, or from your local or state government.”
In terms of potential cons someone should be aware of going into a reverse mortgage transaction, a spouse who lives in the home with the borrower may “be stuck” after the borrower dies, Tarpley writes.
“Depending on the situation, a spouse or anyone else living in your home could be stuck when you die, because the house will sell to pay back the lender,” she says.
Fees may also eat into the loan’s proceeds, she says.
“Expenses like service fees and annual mortgage insurance premiums (MIPs) are taken out of what the lender pays you,” Tarpley writes. “You’ll earn even less each month if you decide to roll your closing costs into the monthly payments rather than pay them at closing.”
Some unscrupulous actors may also try to use the idea of a reverse mortgage to take advantage of a vulnerable senior, an assertion backed up by a Department of Housing and Urban Development (HUD) Office of the Inspector General (OIG) bulletin issued earlier this year.
“Fake lenders could come out of the woodwork to offer you a reverse mortgage that isn’t real, and they steal your money,” she says. “To avoid a scam, don’t respond to unsolicited emails or phone calls about reverse mortgages. Do your own research and approach a lender, instead of responding to a lender who approaches you.”
Read the article at Business Insider.