One of the biggest fears for people cognizant of (and who care about) future finances is whether or not they are saving enough for retirement. The media likes to portray retirement as a fun-filled, party time where travel and golf twice a week are the soup du jour. But all of these things cost a lot of money. On top of these costs, there are normal living expenses and unexpected medical bills despite no longer bringing in an actual paycheck.
There are things that each of us can do to mitigate running out of money in our retirement years, such as saving more now, paying off your mortgage before entering retirement, fighting your property taxes before turning a certain age where they will remain that same rate until death, etc. But what happens if you haven’t prepared for retirement, or if your retirement savings are eaten up by inflation, or if things happen out of your control and you simply did not save enough money?
A Reverse Mortgage is an option for seniors who find themselves in this situation. My grandparents, who did not save any money for retirement, opted for this a few years ago after their expenses exceeded their monthly social security checks. While I do not know the details of their Reverse Mortgage, I did become curious about them in general. Here’s what I found:
What is a Reverse Mortgage?
A Reverse Mortgage allows you to turn part of the equity in your home into cash without having to actually sell the house. The loan does not need to be paid back until one of the following occurs: the owner moves or dies. At that point, the bank will sell the property, take enough money to pay off the loan/interest, and then any existing equity is given to the heirs.
What are the Benefits of a Reverse Mortgage?
The obvious, and almost immediate, benefit of taking out this type of loan is an infusion of cash to supplement your retirement savings, social security income, medical bills, home renovations, or maintain your overall standard of living.
The Risks and Cons of a Reverse Mortgage
Let’s look at some of the risks and cons of taking out this type of loan:
- May Still Not be Able to Afford to Stay in the Home: Homeowners need to know that they are still responsible for paying the annual taxes, property insurance, and property maintenance after taking a Reverse Mortgage. This means that if a Reverse Mortgage is allowing you to stay in your home, you need to calculate what you will need each year for these extra costs and then determine if you can afford to stay in your home or not.
- Death of the Main Borrower Could Leave You in Foreclosure: While this doesn’t happen often, it is worth mentioning. This woman was not eligible to be on the Reverse Mortgage loan. Her husband, as the sole borrower, died before her, forcing her into foreclosure because she could not pay back the loan upon his death.
- Loan in Default: If the owner fails to pay property insurance or property tax bills, then the Reverse Mortgage loan is in default (as of 2012, roughly 9.4% of these types of loans were in default).
- Substantial Upfront and Ongoing Fees: Upfront fees include origination fees, Mortgage Insurance Premium Guarantee fees, Appraisal fees, and closing costs (fees for attorneys, title search, inspections, property taxes, etc.). No matter what type of Reverse Mortgage loan you take out, you will need to pay a 1.25% annual insurance premium on the outstanding loan balance on top of interest on the loan. It should be noted that in 2010 a new option became available called the HECM Saver, which cuts the initial insurance premium from 2% down to 0.01% of your home’s value.
Where Can I Get a Reverse Mortgage?
To be eligible for a Reverse Mortgage, you must be at least 62 years of age or older, and you must continue to live in the home as your primary residence. You must also own the home, or have a mortgage left that is small enough to be paid by the proceeds of the loan at closing. If you are still interested in this option, then check out HUD.gov.
According to the Department of Housing and Urban Development (HUD) program, the majority of borrowers in default took proceeds in a lump sum, rather than in monthly installments over a number of years. So if you are looking into this as an option to supplement your retirement savings or quality of life, then try to do so in monthly installments.
Have you or anyone you know taken a Reverse Mortgage? How is it going?