Reverse mortgages offer Baby Boomers a to a way effectively “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 for your home for ten years and have paid in $70,000 over this period. Taking out a reverse mortgage for your property would allow you to access some or all of that money.
Remember that there are 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 borrow 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 income once they retire, but their expenses may stay the same or even increase in many cases.
Unlocking the built-up equity from your home 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.
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 fees, and you may have the option of paying the closing fees 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.
Frequently Asked Questions
Can I Get a Reverse Mortgage From My Bank?
The vast majority of banks don’t offer reverse mortgages. Instead, such loans are provided by dedicated reverse mortgage lenders, who usually only offer this particular financial product.
Are the Payments Taxable?
No, your reverse mortgage payments – whether as a lump sum or a fixed monthly payment – aren’t taxable.
Will a Reverse Mortgage Impact My Social Security or Medicare Benefits?
In most cases, the additional income you get from a reverse mortgage won’t affect your Social Security or Medicare benefits eligibility. However, it is still worth double-checking with each to make sure you won’t lose any of your benefits after taking out a reverse mortgage.
What About Defaults on Reverse Mortgages?
You should carefully read over the terms of your reverse mortgage agreement to understand all the possible ways the lender may default or void the loan agreement. One of the most common ways a reverse mortgage ends up in default is the owner not looking after the property (for example, by not organizing and paying for maintenance or repairs as required.)