A reverse mortgage is a type of loan that is specifically designed to enable seniors (over age 62) to tap into their home equity and convert it into cash. It allows seniors to borrow against the equity in their home without having to make regular monthly payments.
Instead, the loan balance is paid off when the borrower passes away, moves out, or sells the house.
The loan amount borrowed is typically based on the age of the borrower (older borrowers are eligible for more money) and the value of the home. This is important, as monthly payments are not required, so the amount a senior receives from the loan cannot exceed the total amount of equity in the home.
A reverse mortgage typically comes with two types of fees — an origination fee and a servicing fee — both of which are typically paid upfront. There can also be other fees associated with the loan, such as closing costs, appraisal fees, and title insurance.
Reverse mortgages are a great tool for seniors who are struggling to make ends meet in retirement, and it can be a viable option for those who don’t want to sell their home and move. It’s important to note, however, that there are several caveats to consider when taking out a reverse mortgage.
It can have a major impact on the borrower’s estate and heirs, so it’s important to consult with a financial advisor before making a decision.
What is the downside to a reverse mortgage?
A reverse mortgage can be a helpful loan option for some older homeowners, but it does come with potential drawbacks.
One downside of a reverse mortgage is loan fees. The fees associated with this type of loan tend to be higher than those for a conventional mortgage. Most reverse mortgages require an origination fee, a mortgage insurance premium and closing costs.
These can quickly add up and add to the expense of the loan.
The repayment terms can also be a downside of a reverse mortgage. With a reverse mortgage, the homeowner must repay the loan with interest when they die, when they move out of the home, or when they sell the home.
The loan becomes due in full at the end of the term, which means the homeowner may be forced to sell the home to pay off the balance of the loan.
Another downside is eligibility. Reverse mortgages are only available to borrowers who are 62 or older. If a homeowner is under the age of 62, they won’t be able to access this loan.
Lastly, there are limitations on how the money from a reverse mortgage can be used, with many lenders requiring the funds to be used for home improvements, medical bills, and other expenses associated with the home.
While this may be a benefit for some, it can be limiting for others who need access to the funds for other purposes.
What Suze Orman says about reverse mortgages?
Suze Orman discusses reverse mortgages frequently, generally cautioning against them unless they are absolutely necessary, as taking out a reverse mortgage means accessing equity that is needed for retirement health and other long-term planning.
She believes you should aim not to take out a reverse mortgage and stresses that you should discuss all other alternatives with your financial advisor and family before considering a reverse mortgage.
Suze recommends those considering a reverse mortgage should understand the advantages and disadvantages, the charges and fees associated, and the potential tax implications. She believes the loan should NOT be taken if you don’t have financial needs, if you plan to remain in the home for only a short period, or if the costs outweigh the benefits.
Furthermore, Suze advises to beware of reverse mortgage scams and to consider talking to a HUD-approved reverse mortgage counselor before signing on any paperwork. Additionally, she suggests talking to an experienced attorney before signing an agreement to make sure you understand all the terms, conditions, and loan costs.
Lastly, she encourages you to ask your lender questions to ensure that you’re comfortable with the product, the loan servicing, and the agreement.
Why are people disappointed with reverse mortgages?
People are often disappointed with reverse mortgages because of a perceived lack of transparency and miscommunication surrounding the process. Reverse mortgages are complex financial instruments that can be difficult for people to understand.
Lenders often charge high origination fees and other surprise costs associated with a reverse mortgage, and these costs may not even be mentioned until after an individual has already gone through the process.
Additionally, the terms and conditions of reverse mortgages are often misunderstood or misinterpreted, leading to confusion and regret later on. Furthermore, when people take out a reverse mortgage, they are giving up ownership over their home, which is a major decision to make and often not well understood by borrowers.
People may also find their expectations aren’t met with a reverse mortgage, as it is not a “get-rich-quick” type of investment and takes time to reap the benefits. Additionally, not everyone qualifies for a reverse mortgage, and those who do often find they may not be able to receive the full potential benefits due to their age and other restrictions.
Finally, some people may find the quality of customer service associated with the lenders to be subpar. In sum, people are often left feeling disappointed with reverse mortgages due to a variety of factors, such as lack of transparency, surprise costs, poor customer service, and misconceived expectations about the process.
Does AARP recommend reverse mortgages?
Yes, AARP does recommend reverse mortgages. According to the organization, reverse mortgages allow older homeowners to access the equity in their homes without having to make monthly mortgage payments.
The loans are often used to help pay for home improvements, medical expenses, and other basic needs.
AARP considers reverse mortgages to be a potentially valuable financial tool for older homeowners who may need more cash flow during retirement. The organization points out that they should be carefully considered, however, since they can be expensive and complex.
AARP urges seniors to research all their options before deciding, and to consult a financial professional and trusted advisors to make sure they understand all the implications. In addition, AARP has several resources to help seniors decide if a reverse mortgage is right for them, and can provide guidance on selecting the right lender.
How much can a 70 year old borrow on a reverse mortgage?
The amount a 70 year old can borrow on a reverse mortgage depends on a variety of factors, including the age of the borrower, the type of loan, the value of the home and the current interest rate. Generally, the older the borrower and the higher the value of the home, the more money they can receive.
Reverse mortgages are loans that allow homeowners who are 62 or older to access the equity in their homes to obtain a lump sum of cash, a line of credit, or monthly payments. They do not have to be paid back until the borrower moves, sells the property, or passes away.
The amount a 70 year old can borrow on a reverse mortgage is typically based on their age, the value of the home, and the interest rate. The maximum loan amount is capped at the lower of either the appraised value of the home or the maximum lending limit for FHA-insured reverse mortgages, currently set at $765,600.
Additionally, reverse mortgages are only available for primary residences, not second homes or rental properties. Ultimately, the amount a 70 year old can borrow on a reverse mortgage will depend on their individual circumstances and the amount of home equity they have available.
Do you lose your home with a reverse mortgage?
No, with a reverse mortgage, lenders provide money to homeowners and award the borrower with their home’s equity. In turn, the homeowner continues to live in the home, maintain ownership and title, pay property taxes and homeowners insurance, and keep the home in good repair.
This makes a reverse mortgage different from a traditional mortgage, in which the homeowner makes monthly payments over a set period time. With a reverse mortgage, the lender provides a loan, and the homeowner does not have to make any payments.
However, the loan will become due if the homeowner dies, sells the home, or moves out of the home for an extended period of time (more than 12 months). Therefore, the borrower does not lose the home but does need to be aware of the conditions of the loan agreement so they are not at risk of the loan becoming due.
Which category of people are benefited through the reverse mortgage scheme?
Reverse mortgage schemes provide a way for certain categories of people to access capital in the value of their home without the need to sell that home or take on an additional loan. Generally, those eligible to apply for a reverse mortgage are homeowners 62 years and older who have paid off their mortgage or have limited remaining mortgage balance.
The homeowner must occupy the property as their primary residence. Depending on the reverse mortgage product chosen, a homeowner may access funds as a lump sum or as a line of credit, and/or receive income payments.
Reverse mortgages provide a financial opportunity for retired persons, who wish to maintain their lifestyle, stay in their own homes, or free up funds for other necessary living costs. Though the types of reverse mortgage schemes available in different countries may vary, they can have tremendous potential for those in the categories mentioned above.