Many seniors that own their homes wonder if a reverse mortgage is right for them. By learning more about what reverse mortgages are and exploring the pros and cons of a reverse mortgage, it’s easier to determine whether it’s a smart move.
While the topic can be a bit complex, it’s easier to grasp than one would expect. Come with us as we explain how a reverse mortgage works, answer common questions about them, and discuss the reverse home mortgage pros and cons.
How Reverse Mortgages Work
In the simplest sense, a reverse mortgage is an income-creating option for retirees that allows them to receive payments based on the equity available in their homes. It’s technically a type of loan where the homeowner exchanges the value of their home for cash from the lender. The lender then has a stake in the house.
During the process, the homeowner keeps the title. Additionally, the payments they receive from the lender usually aren’t taxable. However, homeowners with reverse mortgages do contend with fees and interest, causing the arrangement to dig deeper into their home equity over time. Essentially, the debt builds up, giving the lender a larger claim to the property’s value as time passes.
The homeowner is still responsible for specific costs relating to homeownership. For example, taxes, insurance, maintenance, and similar expenses are the homeowner’s responsibility. In some cases, reverse mortgage lenders require homeowners to set aside specific amounts of money to address those costs.
The lender is repaid when certain triggering events occur. For example, the homeowner’s passing, moving out of the property, or selling the home can all launch the repayment process. Precisely which apply may depend on the arrangements in the reverse mortgage contract.
Common Questions About Reverse Mortgages
Can a Reverse Mortgage Be Reversed?
Many people wonder, “Can you reverse a reverse mortgage?” Luckily, the answer is “yes.”
Exactly how you can reverse a reverse mortgage depends on when you want to walk it back. If you sign the paperwork and change your mind within three days, you can exercise your right of rescission without penalty. If it’s been longer than that, you’ll need to pay the lender what’s owed.
Usually, repaying the lender can occur in a few ways. While using cash is an option, you can also refinance the amount with a conventional loan or sell the property and use the proceeds to cover the cost.
How Do You Pay Back a Reverse Mortgage?
Usually, you have a few options for paying back a reverse mortgage. You can use proceeds from the home’s sale or a loan to cover the cost. Paying in cash is also an option.
What Is a Reverse Mortgage Foreclosure?
If a repayment triggering event occurs and the reverse mortgage debt isn’t paid off, a reverse mortgage foreclosure occurs. With this, the lender initiates a foreclosure – essentially using the same approach as a foreclosure associated with failure to pay a traditional mortgage – to gain ownership of the property, allowing it a method for recouping the money borrowed by the homeowner.
How Many Types of Reverse Mortgages Are There in New York?
There are two types of reverse mortgages in New York. First, there’s the Home Equity Conversion Mortgage (HECM) program. That option is operated by the Federal Housing Administration (FHA), meaning it’s backed by the federal government. With this approach, there’s a cap, so it may not work for high-value properties that would typically require a jumbo mortgage to purchase.
Second, there’s a proprietary reverse mortgage in New York. This option follows requirements set forth in New York’s Real Property Law Section 280 or 280-a and functions very similarly to the HECM option. Usually, the only difference is that proprietary New York reverse mortgages aren’t capped, allowing them to work as jumbo reverse mortgages.
How Does a Reverse Mortgage Work When You Die?
When the homeowner passes away, that triggering event initiates the repayment process. Usually, the homeowner’s heirs have to repay the lender. They can use cash, loans, or proceeds from the home’s sale to cover the cost.
If the lender is owed the home’s full value, they can also provide a deed in lieu of foreclosure if they prefer. Otherwise, the lender may initiate the foreclosure process.
Can You Buy or Sell a House with an Existing Reverse Mortgage?
Buying a house with an existing reverse mortgage isn’t as complicated as it would seem. The amount owed by the seller simply has to be covered before the home transitions to you.
In many ways, buying a house with a reverse mortgage is just like purchasing a home with an existing traditional mortgage. During the closing process, funds from the sale address the seller’s reverse mortgage debt, eliminating the lender’s claim on the property.
Selling a house with an existing reverse mortgage is also reasonably simple. The homeowner just has to use proceeds from the sale to cover what’s owed, clearing the debt associated with a reverse mortgage.
The Pros and Cons of a Reverse Mortgage
Benefits of a Reverse Mortgage
If you’re a senior looking for a reliable income source, a reverse mortgage can provide one. You’ll receive payments from the lender based on what’s outlined in a contract, giving you access to cash predictably.
In many cases, payments associated with a reverse mortgage are tax-free. In most situations, the payments are considered loan proceeds, so they don’t qualify as taxable income.
Remaining in Your Home
With a reverse mortgage, you’re usually allowed to remain in the home for the rest of your life, even if you tap all of the available equity. As long as you meet the other conditions of the loan – such as paying property taxes and insurance, as well as handling maintenance – you typically won’t have to move even if you exhaust all of the proceeds.
The Repayment Amount Can’t Exceed the Home Value
Legally, reverse mortgage loans for seniors can’t have a repayment amount that exceeds the home’s value, regardless of whether you borrowed in excess of the value. This is mainly to protect homeowners since home values fluctuate over time, ensuring that they can cover the debt if the home is sold.
Heirs Can Inherit the Home
An heir can inherit a home with reverse mortgage debt. As long as they repay the outstanding debt, they’ll be allowed to keep the property.
Drawbacks of a Reverse Mortgage
Problems for Heirs
If you want to leave your home to an heir, having a reverse mortgage makes that harder. One of the biggest reverse mortgage problems for heirs is having to repay the lender. If your heirs don’t have access to enough cash or can’t qualify for financing, they may not be able to keep the house regardless of what’s outlined in your will.
Household Members May Not Be Able to Stay
Another one of the major disadvantages of a reverse mortgage is that other household members might not be able to stay in the home after your passing. If they aren’t on the loan and can’t repay it, the lender can foreclose on the property to secure what it’s owed.
Moving Triggers Repayment
Reverse mortgages typically require that the home be the borrower’s primary residence. While you might intend to stay in your house indefinitely, that isn’t always an option. If your health declines and you need to move into a care facility, that will trigger the repayment.
High Fees Can Eat into Equity
Many reverse mortgages come with substantial fees, eating into your home equity far faster than you may expect. While the costs are traditionally outlined in the contracts, many homeowners overlook this key detail, leaving them in a tougher position than expected.
Failure to Pay Certain Costs Triggers Repayment
If you might struggle to handle the property taxes, insurance payments, or home maintenance expenses, a reverse mortgage isn’t’ ideal. Failing to follow the requirements regarding those expenses can trigger loan repayment.
Is a Reverse Mortgage a Good Idea?
Whether a reverse mortgage is a good idea depends on your unique situation. For some, having a reliable source of income makes it worthwhile. However, the complexities of the arrangement, fees, and requirements could cause it to be a poor fit for others.
Consider the pros and cons of reverse mortgages as a starting point and consider speaking with a financial advisor. That way, you can determine if it’s potentially right for you.
Reverse Mortgage Alternatives
If you’re looking for an alternative to a reverse mortgage, some choices are available. If you’re dealing with an existing mortgage, cash-out refinancing might allow you to tap equity, while a traditional refinance could lower your payment.
You could also explore selling the home to your intended heir and secure their permission to remain in the house. Then, you could use the proceeds as income. Just be aware that there may be tax implications before you go this route.
Finally, you could simply sell and downsize. That way, your home costs less, and you may get to keep some profit in cash.