The Pros and Cons of Reverse Mortgages

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The Pros and Cons of Reverse Mortgages (Retirement Mortgages)

 A discussion of financing options available to seniors and their families.

If you have not gone through the issues of an aging relative, their finances, and how best to deal with them, your time will come.   I just went through it twice in the last three years, first with my father and now with my father-in-law.

Below are our thoughts. We will go about this in a “Question and Answer” format so it is easier to focus on the areas you would like to understand better:

 

What are the best financing options for seniors out in the market today?  

Institutional lenders are not allowed to discriminate based on age, and hence, the cheapest money out there is the standard “A Paper” Institutional Loans you are used to getting for yourselves.   As long as you have good credit, ample income to make the total debt ratio guideline (typically up to 43%), have decent liquidity, and have the required equity in your home, you can qualify for the best low cost institutional financing.   Furthermore, as long as you feel comfortable making the mortgage payments that will be the cheapest money you can borrow.

After that, the next cheapest money that can be borrowed is through a Home Equity Line of Credit (HELOC) against your primary residence.  Most banks will make these for no cost to you and the rates on these have been extremely attractive for quite some time now.  You also have to qualify for these as just like the first category of loans noted above.  Most have a 10 year draw period with interest only payments and you only pay interest on the amount you draw on the line of credit.

The third lowest cost method of borrowing for seniors would be a Reverse Mortgage.   There can be costs involved in getting these and the interest rate is a little higher than HELOC’s, but they can still be very useful to a senior.   When deciding which route to go, it is best to fully understand the possibilities with a Reverse Mortgage, so that a mistake is not made.   In most cases you can select the institutional 1st TD or the HELOC, and then when the time is right, convert that to a Reverse Mortgage.

 

What determines the best route for a senior to go, financing-wise?   

In most cases, we would recommend that the client go with the least expensive (both rate and cost-wise) financing route.  If they can qualify for and comfortably afford the mortgage payments, I would recommend getting a standard-fixed-rate mortgage, while the rates are low.    That will eliminate the interest rate “worry” that comes with an adjustable-rate-mortgage and fix the payments for the remaining life of the loan.   If they want to have access to the balance of their equity should a financial need arise, we would recommend a HELOC that can be accessed in a time of need.  It is a great “security” plan to have in place should a financial need arise.    Remember, you don’t get charged interest on the funds you are not using on the line of credit.   Many seniors don’t have the qualifications to obtain “A Paper” Institutional Loans and HELOCs though.   However, if they have ample equity in their home, and a good payment history on their financial obligations, they can get a Reverse Mortgage which could solve a lot of their financial obstacles.

 

What are the benefits of a Reverse Mortgage?  

The biggest benefit is that the borrower will never have to make another mortgage payment on the home the rest of their life or however long they stay in the home.   They still have to pay their property taxes, homeowner’s insurance and any HOA payments though.  In addition, the loan can be structured to give the senior monthly income, periodic cash draws, or a combination of the two.  Reverse Mortgages are by far the best financing alternative for ageing homeowners that want to eliminate their mortgage payment or can’t qualify for a traditional mortgage.

 

What are the negatives with Reverse Mortgages?  

Most come with various costs, however, there is a way to get them done for no cost other than potential mortgage insurance.   If the borrower elects a pricing option with costs, the good news is these costs have come down to a reasonable level in recent years.  Another negative is they have FHA Mortgage Insurance due on them, which increases the cost of the money.   Both the interest and the FHA Mortgage Insurance accrue on the Reverse Mortgage.    However, it is very important to note that the mortgage insurance also protects the borrower should the lender go out of business, as HUD will step in and insure that the borrower will continue to receive their periodic payments on the loan that they contracted for.

 

At what point does a Reverse Mortgage have to be paid back?   

When the last surviving spouse passes or moves out of the home.  At that point, the Reverse Mortgage Lender gives the heirs time to refinance and pay off the Reverse Mortgage or sell the home.   All remaining net equity passes to the heirs.

 

How old do you have to be to qualify for a Reverse Mortgage? 

62 years old.

 

What types of properties qualify for a Reverse Mortgage? 

Houses, approved condos/townhouses, and owner occupied 1-4 unit properties.

 

Can a Reverse Mortgage be used to purchase a property?

Yes

 

What is the maximum loan amount? 

The jumbo maximum loan is as high as $2,250,000, while the FHA option is lower.  Every borrower’s needs are different. We need to fully analyze each situation to tailor the best financing package for the borrower. Bottom line there is a lot of flexibility here.

 

What is the maximum loan to value?  

Roughly 50%, but it is more complicated than that and there is a formula that is used based on the borrowers age, property value, and form of Reverse Mortgage requested.

 

Do you do Reverse Mortgages at Residential First Mortgage?  

Yes, and we are always happy to answer all your questions about all of our loan products.

 

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