Reverse mortgages offer Baby Boomers a way to effectively refinance and “reverse” all or some of their mortgage payments to unlock their home’s built-up equity value without losing the right to live there (in most cases.)
For example, let’s say you’ve been paying a mortgage loan on your home for ten years and have paid in $70,000 over this period. Taking out a reverse mortgage for your property would afford you the ability to access some or all of that money.
Remember that there are lender fees – both one-off and ongoing – to take out a reverse mortgage that eats into the payout. Also, because of the interest charges on your mortgage, the real equity value locked in your home will be considerably less than how much money you’ve paid in (in the above example, the $70,000.)
A reverse mortgage is essentially a type of loan in which you become borrowers of money against your home’s purchased equity.
Most reverse mortgage loans are only available to those aged 62 and over. The loan is usually only repayable once the debtor passes away or stops using the property as their primary residence.
What Are the Benefits of a Reverse Mortgage?
The principal benefit of a reverse mortgage is that it allows Boomers to access their home’s built-up equity without losing the right to live there.
A reverse mortgage can often be a cost-effective and affordable source of finance, and this type of loan tends to have quite a high approval rate, unlike many unsecured loans. However, it’s not always the best source of financing for Boomers, so you should consider all of your other options and see how they compare to getting a reverse mortgage on your property.
How Can a Reverse Mortgage Help Baby Boomers?
Retirement can be an expensive, financially challenging period of your life. The majority of Boomers see a considerable reduction in their monthly income once they retire, but their expenses may stay the same or even increase in many cases.
Unlocking the built-up equity from your estate and converting it into cash via a reverse mortgage can be an excellent way for Boomers to have a better standard of living in retirement.
Whether you want some extra cash to go on exotic vacations, launch a new business, or pay for a vacation home, a reverse mortgage is definitely worth considering. But keep in mind that there might be restrictions. The proceeds of some reverse mortgages may only be used toward a handful of pre-agreed expenses. So be sure to check this with your reverse mortgage lender before committing.
Types of Reverse Mortgages
There are a few different types of reverse mortgages from which Baby Boomers can choose. It’s important to consider all of them to figure out which is most suitable for you, particularly when it comes to repayment terms, eligibility, and cost.
The three main types of reverse mortgages are:
Single Purpose Reverse Mortgages
A single-purpose reverse mortgage is a bit more restrictive than some of the other types of reverse mortgages. You can only use the money loaned to you on an expense that has been pre-approved by the lender, such as home renovations, for example.
It is the cheapest type of reverse mortgage out there, with many non-profit organizations and local governments that offer them not charging an origination fee.
Single-purpose reverse mortgages aren’t as easy to get approved for as some of the other types of reverse mortgages, and the proceeds can’t be spent on anything, which may be an issue for some Boomers.
Home Equity Conversion Mortgages (HECM)
HECMs are by far the most popular type of reverse mortgage, as they account for over 90 percent of all reverse mortgages issued in the United States. Money raised from a Home Equity Conversion Mortgage can be spent on whatever the debtor desires, so they offer a lot more flexibility than single-purpose reverse mortgages.
HECMs are backed by the US Department of Housing and Urban Development (HUB) and are provided via dedicated FHA reverse mortgage lenders.
Proprietary Reverse Mortgages
Proprietary Reverse Mortgages, sometimes called jumbo reverse mortgages, are provided by wholesale reverse mortgage lenders. These reverse mortgages can be as large as three million dollars, and they aren’t insured by the US Federal Government, so their rules and specific conditions vary from State to State.
Payouts vary depending upon the details of the mortgage. Some allow Baby Boomers to access the built-up equity of their home in a lump sum, while others provide a monthly payment or credit line.
Here’s some more info on the different payout options available and which type of reverse mortgage they are usually associated with:
A lump-sum payment allows you to get access to all the money in one go, which is great if you’re looking to make a large purchase with the proceeds and don’t want to wait to save up the required funds gradually.
Lump-sum payments are most often issued when a HECM reverse mortgage is used, though they can also be arranged with some other types of reverse mortgages.
Fixed payments are sometimes preferred by homeowners, particularly if you’re looking to use your reverse mortgage proceeds to fund your living expenses in retirement. There are two types of fixed payments from which to choose: term payments or tenure payments.
If you opt for term payments, you will be paid a fixed amount every month for a pre-agreed period of time. On the other hand, if you take out a reverse mortgage with tenure payments, you are paid a fixed amount every month so long as you live in the property as your primary residence.
Lines of Credit
Another less orthodox payment option is a line of credit.
This loan essentially gives home owners access to funds which they can borrow if they choose to do so. The longer they wait, the higher the amount of credit to which they have access.
6 Reverse Mortgage Fees You May Have to Pay
There are several potential fees associated with taking out a reverse mortgage, which Baby Boomers should consider. Here are 6 you should be aware of…
This is the fee you pay to have your property appraised/valued. You’re typically looking at spending anywhere around $300 to $600 for a professional appraisal (required for HECMs, but not other types of reverse mortgages.)
You will typically be charged a counseling fee of $100 to $150. This fee is mandatory for HECM reverse mortgages.
Mortgage Insurance Premiums
You will be charged an initial Mortgage Insurance Premium (MIP) of up to two percent of the loan amount (for any reverse mortgage.) For example, if your reverse mortgage is worth $200,000, you could have to pay a MIP of up to $4,000.
Loan Origination Fees
The loan origination fee is dependent on the real value of your property, and you could pay up to $6,000 for this particular upfront fee.
Closing Costs and Fees
There are a few different closing fees, as you have to pay for items like loan recording, credit checks, and inspections. Most Boomers end up paying between $500 to $2,000 in closing costs, and you may have the option of paying the closing costs directly from the proceeds of your reverse mortgage.
The ongoing fees of taking out a reverse mortgage are less evident and explicit than the upfront mentioned above fees, so it’s essential to be aware of them before committing to a reverse mortgage.
First, it’s important to note that you will still have to pay annual mortgage insurance premiums, which are usually between 0.5 and 1 percent of your remaining mortgage balance.
Most dedicated reverse mortgage companies also charge a monthly fee for handling the administrative side of the loan, in addition to a servicing fee.
Furthermore, the terms of a reverse mortgage usually require the debtor to purchase homeowner’s insurance for the property to protect its value against potential damage.
Finally, you should factor in maintenance costs (although you would probably end up paying these anyway), as lenders require you to keep the property in good condition as part of the terms of the loan.
How Can I Apply For a Reverse Mortgage?
The first thing to do is to confirm that you’re eligible for a reverse mortgage. Most dedicated reverse mortgage lenders only provide financing to those aged 62 and over, though some other companies work with debtors who are a bit younger.
However, it would help if you kept in mind that such companies are only loosely regulated, so it’s best to stick with a dedicated reverse mortgage company.
Next, shop around and find the right reverse mortgage lender before meeting with a HUD-approved counselor. This counselor will help you look at your options and make sure a reverse mortgage is the best route for you.
You will then need to complete your reverse mortgage application, close the transaction, and pay the required upfront fees.
Things to Look Out For When Comparing Plans
As you have probably figured out by now, there is quite a lot of variation between different reverse mortgages – and it’s not always clear to see which is best for you.
Here’s a rundown of some of the most important things you to look for when comparing reverse mortgages.
As discussed earlier, there are loads of different types of fees associated with taking out a reverse mortgage, so the total cost of different reverse mortgages varies hugely. Therefore, it’s very important to consider all of your options, do the math (for both the upfront and ongoing fees), and then determine which is most cost-effective for you.
As with any type of financing, you should make sure you fully understand the terms of your reverse mortgage. In particular, understand how and when you will need to repay it, what the proceeds can be spent on, and how it may be voided.
While some reverse mortgages are quite easily accessible to any homeowner aged 62 and over, others are far more difficult to obtain – and only certain Boomers may be able to utilize them.
So, check early on in the process which types of reverse mortgages you are eligible for, so you can avoid wasting time considering one which isn’t even an option for you.
Common Questions About Reverse Mortgages
Who owns the house with a reverse mortgage?
One of the most common misconceptions about a reverse mortgage is that the lender owns the home, similar to a traditional mortgage. This is not the case. A reverse mortgage is similar to a traditional mortgage in that you are borrowing against your home as security for the loan. You still retain the title to your home. The only difference is that the loan is not repaid until you no longer live in the home for any reason. Interest and fees are added to the loan every month, and the balance grows. The balance goes up, not down over time, but you still own your home.
Does credit affect a reverse mortgage?
In retirement, many of the traditional sources of income no longer exist. You often have medical bills that continue to mount, and your home might need repairs. Although credit standards for reverse mortgages are not as strict as for traditional mortgages, you still have to meet many of the same requirements.
For instance, you will still need to meet minimum credit score requirements and debt-to-income ratios. The main reason for this is that you have to demonstrate your ability to maintain the home and meet the responsibilities of paying property taxes. You need to show the ability to take out a loan to fix the roof or replace the furnace if need be.
What responsibilities does the seller have?
As a seller, you still have certain responsibilities that you will have to carry out for the rest of your life or the term of the loan. You must maintain the home to make sure that it retains its value when it comes time for the bank to recoup its costs. You must also live in the home as your primary residence. You cannot take out a reverse mortgage on rental or additional properties that you own. Finally, you must maintain insurance and keep up with paying property taxes.
How is a reverse mortgage paid?
The borrower or their heirs will have to pay back the loan when the property owner no longer lives there. This is usually achieved by selling the home, which is why it is important to make sure the home retains its value. Otherwise, the difference may have to be paid back, but there are many options available such as mortgage insurance or selling the home. They can also obtain a mortgage, pay back the reverse mortgage and live in the home.
Do you have to have any money in savings?
Unfortunately, not everyone has enough money set aside for retirement, which is why the reverse mortgage was invented. In some cases, the lender might require that you place some money aside or in escrow to make sure that you can keep up with property taxes, homeowner’s insurance, and home repairs. This is especially true for those who do not have perfect credit. Most reverse mortgage lenders understand that bad things happen to good people, but they will still take precautions to reduce their risk.
What is the impact of a reverse mortgage on your credit score?
Another common misconception is that a reverse mortgage will ruin your credit, but in fact, it does not have an effect. Most reverse mortgage lenders do not report to credit agencies. You cannot be late on mortgage payments that you do not have. You can use reverse mortgage funds to help improve your credit by paying down high-interest credit cards or helping to make other obligations on time.
How much do I qualify for?
The amount that you qualify for depends on your home value, mortgage balance, and the age of the oldest homeowner. The reverse mortgage will pay off the existing money that you still owe on your mortgage. For example, if your home is worth $150,000 and you still owe $50,000 on your mortgage, at 65 years old, you are eligible for around $37,450.
Using this same example, if you are 85 years old under the same circumstances, you would qualify for around $62,500. If you are 65 years old, your home is worth $150,000 and you still owe $85,000 on your home, you would only qualify for around $2,500. These three factors are used to determine how much you qualify for under your circumstances.
What happens to my spouse if I should die?
Reverse mortgages are protected under a 2014 HUD law that allows your spouse to remain in the home and to continue to defer loan repayment as long as the loan requirements are met. This means that your spouse must be able to maintain the home, meet all insurance, and tax requirements.
Can I change my mind?
You can change your mind on a reverse mortgage. You have three days after closing to back out of the deal at no obligation. However, if you should decide that this is not a good option for you after that time, you would have to begin paying back any loan balances that have accrued.
What happens if the value of my home goes up or down?
We cannot predict what housing prices will do in the future in any particular part of the country. If your home value goes up and you should pass away, the loan is paid in full. However, if your home value goes down over time and is less than the loan balance upon your death, your heirs could have to pay up to 95% of the appraised value of the home at the time of sale. The rest will be covered by mortgage insurance. If you decide to sell your home and move, mortgage insurance will usually cover the difference between the loan amount and the appraised fair market value at the time of sale.
How do I receive the money for the loan?
Depending on the type of loan that you take out, you can receive the money as a lump sum, line of credit, or monthly payments.