Many loan companies are advertising reverse mortgages to Texas homeowners over the age of 62. You may even know one or two people who have taken out a reverse mortgage themselves. It is often advertised as a great way to supplement your income or pay for a long-awaited vacation or home improvement. But what exactly is a reverse mortgage? Is it safe? And what should a homeowner living in Texas know before deciding to apply for one?
Our home is often our greatest financial asset, so it’s important to be educated on the pros and cons of taking out a loan against it. Learn more about reverse mortgages in Texas and what they could mean for you below.
What is a Reverse Mortgage?
According to the Texas Legislative Council (TLC), a reverse mortgage is “a loan that allows older homeowners to convert a portion of their home equity into cash without selling the home.”
Home Equity
Home equity refers to the market value of your house and land minus any debt still owed against it. In other words, home equity refers to the amount of money you could keep if you were to sell your home and pay off your mortgage or any other loans that were secured against your house that day. The equity increases as mortgage payments are made and as the market value of the property rises.
For example, if bought a home worth $120,000 with a $40,000 down payment, then your equity at that time would be $40,000. If you then pay $5,000 to the mortgage, then the equity goes up to $45,000. If the market value of the home has grown by $15,000 during that time, then your total equity is now $60,000.
Reverse mortgages in Texas allows you to tap into this equity without actually selling the house.
Paying Back the Loan
Reverse mortgages use your house as security or collateral just like a traditional mortgage. They also accrue interest over time just like any other loan. You can pay the loan back at any time, again just like any other loan, but this is not required. What is special about reverse mortgages is that, rather than paying in regular installments, you simply pay off the lump sum at once with the sale of your house. Until that day, and assuming that you continue to meet all requirements, you do not need to make a single payment.
Home Equity Loans and Lines of Credit
Though they are commonly confused, a reverse mortgage is not a home equity loan, nor is it a home equity line of credit (HELOC). These are sometimes referred to as “second mortgages” because they are also secured against the home and require monthly payments. They are similar in that they borrow against your home equity and will accrue interest over time.
They are different, however, in their requirements, payout methods, and payment methods. For instance, the latter two options require monthly payments, while the reverse loan does not. The latter two can also be made on top of a mortgage, but a reverse mortgage requires the original mortgage to be paid before accessing the loan.
What are the Different Types?
This article focuses on the Home Equity Conversion Mortgage (HECM) and its requirements, as these make up the vast majority of the reverse mortgage market in Texas. They are federally-insured and backed by the U.S. Department of Housing and Urban Development (HUD). However, there are two other types offered within Texas.
A single purpose reverse mortgage is the least expensive option of the three types and requires you to state the purpose for the loan. These are usually offered through the state or local government or through various non-profits.
Proprietary reverse mortgages, on the other hand, come from private companies. While they can have less stringent requirements and offer larger amounts of cash, they are not backed by any government.
What are the Different Payout Options?
Payments can be received as regular paychecks of a fixed sum or as a single lump sum. It is common to also offer reverse mortgages as a line of credit, but this option is not available in Texas according to the TLC.
What are the Costs Associated with a Reverse Mortgage?
The HECM requires counseling from a third-party HUD-approved advisor by law, which usually costs around $100-$200. An appraisal of the home will also be needed. Other initial costs include closing fees, loan origination fees, and the initial insurance premium.
From there, you will be expected to pay the insurance fees and property taxes, as well as home maintenance costs, for the duration of the loan. There may also be a regular loan servicing fee.
What are the Pros and Cons of Obtaining a Reverse Mortgage?
Pros
- No monthly payments
- No income tax
- Your choice of a bulk payment or an annuity.
- Use the money without restrictions (unless taking a single-purpose loan)
- You can pay off the remainder of your first mortgage
- Interest rates are often low
- Your spouse can inherit the reverse mortgage
Cons
- Defaulting results in the loss of your home
- Cannot move out of that home without paying the debt
- Interest piles up over time
- Children or other heirs will not be able to keep the house unless they can pay off the loan
- Eligibility for government benefits may be affected
- You may fall victim to a predatory lender.
What Should I Consider Before Deciding if a Reverse Mortgage is Right for Me?
Eligibility
Reverse mortgages require all borrowers to be at least 62 years of age. It requires that the owner pay for home insurance and property taxes for the duration of the loan. The house must be your primary residence and you must live there six months out of a year. Any homeowners association fees must also be kept up on. Failure to meet the requirements may result in rejection of the loan or, if already accepted, in the foreclosure of your home.
Common Concerns
What if I die before my spouse? Will they have to move?
So long as they can meet the same requirements of paying the insurance, paying the tax, and maintaining the home, then they will effectively inherit the reverse mortgage. They will not have to move.
What if I change my mind after taking out the loan?
You have three days after signing the contract to cancel the loan without cost. After that, your best bet is to return all money lent to you as soon as possible in order to reduce the amount of interest to pay.
What if my house’s market value drops?
So long as the amount of equity is large enough to cover the cost of the loan, including interest, at the time of sale, then there will be no debt to pay. If the value of the equity drops below that of the loan, however, then the borrower or the heir — whoever owns the property at that time — will have to pay the difference.
Questions to Ask Before Applying
What will I do with the money?
Though this may be obvious, one should always have a plan when taking out any sort of loan.
Am I comfortable with the house being sold after I and my co-borrower, if I have one, move out or pass away?
Most people who take out a reverse mortgage do so expecting that the loan provider will take their house after they and their spouse or co-borrower are gone. The upfront costs to taking out a reverse mortgage can be quite high, so it isn’t generally turned to for small loans.
What are my other options?
A reverse mortgage isn’t the best solution for everyone. Consider other options such as a home equity loan or HELOC, a property tax deferral, or downsizing, before committing.
Do I meet all eligibility requirements? Can I fulfill all responsibilities related to the loan for its entire duration?
Though you do not need to make monthly payments to the loan, you are still required to pay home insurance, pay property taxes, maintain the home, and live in it for at least 6 months per year. If yo don’t, your loan provider will no longer have to wait and can foreclose on your property.
Do I have enough home equity to make the loan worthwhile?
Your home equity should be at least 50% of the total value of the house, and if the mortgage is not fully paid off, then you will have to use the reverse mortgage to pay the remainder of the original. Is this possible for you, and if paying off the mortgage is not your goal, then will you have enough left over for your own purposes?
How will my other benefits by affected by the loan?
A reverse mortgage will not affect Medicaid eligibility because loans are not counted as income, but it may affect others. Some benefits are calculated using your expenses or the value in your bank account, rather than income.
Is there anyone I would like to share the loan with?
Your spouse does not need to be 62 or older to inherit the reverse mortgage if they file themselves as a “non-borrowing spouse.” For anyone else, though, they must meet all eligibility requirements and be listed as a co-borrower. If this isn’t done then they may be forced to give up the home after you move out or pass away.
Have I discussed this with my heirs, if I have them?
This is a big decision and should be discussed with family members or other heirs to the home. They will be responsible for paying off the debt if they want to keep the house, after all.
What company can I trust?
This is not an advertisement for a specific company, but it is important to make sure that the company you choose is trustworthy. Consider your options and try to go with a company that offers government-backed reverse mortgages rather than proprietary ones.
Where to Get a Reverse Mortgage
You’ve probably seen their ads featuring Tom Selleck on TV and in print publications. AAG is the premier provider of reverse mortgages in the US. They specialize in the financial needs of older adults.
We highly recommend AAG and suggest that you visit them via the orange link below this review.
| 😀 PROS | 😡 CONS |
| Straightforward reverse mortgage options | Must be 62 years old to qualify |
| Financial assessments by qualified experts | No immediate quote available |
| Customized quotes | Interest rates may vary |
Conclusion
In review, a reverse mortgage allows you to access the equity of your home before you actually sell it. Not everyone that meets the eligibility requirements will benefit in the long run from taking out such a loan. Even so, it has helped many seniors in Texas finance their retirements, pay off previous debts, and more. Be sure to know the pros and cons of obtaining a reverse mortgage before deciding if this is right for you and your family.