Here is the 3^rd and final installment of Everything You Need to Know About Reverse Mortgages.  A reverse mortgage is a loan that is only available to homeowners that are 62 years and older.  It allows the borrower to withdraw the equity from a primary residence when there is either no mortgage or only a small mortgage.  There are significant pros and cons that should be fully understood before obtaining a reverse mortgage.    

Pros:  Why you may want a reverse mortgage

There are numerous reasons why people choose reverse mortgages.  Here are the most common:

• You continue to own and reside in your home while the loan is outstanding.
• A non-borrowing spouse can continue to live in the home even after the borrower dies. This is possible if the lender knew about the spouse at the time the reverse mortgage was funded.
• It’s easy to get a reverse mortgage because there are no credit checks. Additionally, having a low income will not pose a problem.
• Senior citizens can supplement their income with either a monthly payment, a line of credit or a lump sum of cash based on their home equity.
• In most cases, there are no restrictions on how the extra cash can be used by the homeowner. For instance, the money can be spent for home repairs, to pay medical expenses or to take a vacation.
• The most attractive feature of a reverse mortgage is that they don’t come with monthly payments. Unlike traditional mortgages, a reverse mortgage usually doesn’t need to be repaid unless the borrower no longer lives in the house, the borrower dies or the house is sold.
• You have the right to cancel the reverse mortgage for up to 3 days after closing.
• Proceeds of a reverse mortgage are considered a loan advance by the IRS and are not subject to income tax. Conversely, payouts from a 401K or traditional IRA are taxable.
• In case the balance of the reverse mortgage exceeds the value of the home, the lender can collect up to 95% of the appraised value or sale price. Neither you nor your heirs will have to pay the excess.  This is common where the market value declines or appreciates at a slow rate.

Cons:  Why you may decide to avoid a reverse mortgage

These are the most compelling reasons why a reverse mortgage is a bad idea. 

• Advertisers often market reverse mortgages as a “magic bullet” or “free money”. These claims are misleading because they hide one cold, hard fact…reverse mortgages are very, very, very expensive.  There are upfront fees that are payable when the loan is funded such as origination fees and mortgage insurance which is required for Federal Housing Administration (FHA) approved reverse mortgages.  Extra monthly costs, called ongoing fees, are added to the principal until the loan is repaid.  Ongoing fees include interest, mortgage insurance (required by the FHA) and administrative costs charged by the lender.
• You must continue to pay homeowners insurance, flood insurance, homeowner association (HOA) fees, property taxes and make repairs on the house.
• A reverse mortgage could result in foreclosure if the requirements are not met. For instance, if the borrower moves from the home, the loan will come due in full.  Additionally, if you don’t make necessary repairs on the home or fail to pay the property taxes or insurance, the lender can start foreclosure proceedings.
• The surviving spouse of the borrower could be forced to move upon the borrower’s death. This could happen if the marriage occurred after the reverse mortgage was funded.
• Con artists prey on the elderly with reverse mortgage scams. Be wary of a salesman that encourages you to pay for home improvements or investment products by taking out a reverse mortgage.   

Final Thoughts…

1. Before signing up for a reverse mortgage, you should get information from a reputable source.  Check out the FHA, AARP or CFPB websites for additional resources.

2. Discuss your long-term financial needs with a trusted certified financial planner or elder law attorney.  Be sure to choose a financial planner who charges a flat fee instead of one who gets paid by commission.

3. Do not sign anything that you don’t understand or feel comfortable with.

4. Take advantage of FHA mandated counseling for prospective borrowers before getting a reverse mortgage.  The counseling is provided by FHA approved counselors and costs about $125.  However, the feed can be waived for seniors in financial distress.  Despite the modest cost, reverse mortgage counseling is extremely beneficial, and could possibly save you thousands in unnecessary costs and fees. 

It is my sincere hope that you have learned something valuable from this series Everything You Need to Know About Reverse Mortgages.  Put this information to use for yourself and your elderly loved ones who are coming to terms with retirement issues.  As I have said in the past, your knowledge is power.  When you are making financial decisions regarding real estate holdings, you always want to be in a position of power so you can make the best choices.