November 14, 2017 by HECM Pro
Are reverse mortgages a good deal? Well, that depends! It depends on whether or not having access to your home’s equity in retirement would be beneficial. Many reverse mortgage borrowers use the reverse mortgage to eliminate existing mortgage payments, pay off other debts, supplement retirement income, add to available retirement assets, do home improvements, etc.
Would any of those options be beneficial for you? Would they perhaps even be life-changing? If so, then a reverse mortgage could definitely be a good – perhaps even phenomenal – opportunity for you.
The reverse mortgage is a fantastic program, but I’ll be the first to say that it’s not perfect for everybody. Whether or not it’s right for you depends on your goals and situation. I can’t say for sure if a reverse mortgage makes sense for you, but I can educate you about the program and let you decide for yourself.
What is a Reverse Mortgage?
The most common reverse mortgage product in the United States today is the FHA-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If you know somebody who got a reverse mortgage, it’s very likely it was a HECM.
The HECM reverse mortgage is designed to give homeowners 62 or older the ability to convert a large portion of their home’s value into tax-free cash without taking on a mortgage payment or giving up ownership of the home. Normally, the only way to tap into your home’s equity is to either sell the home (which means you have to find a new place to live) and cash out your equity, or borrow against it with a traditional home loan and be stuck with a mortgage payment for thirty years.
Obviously, if your goal is to remain in your home and free up cash, it doesn’t make sense to sell or take on a mortgage payment. That’s where the HECM reverse mortgage comes in.
The following are some notable features of the HECM:
- No monthly payments are required and the money does not need to be repaid as long as at least one borrower is living in the home and paying required property charges (property taxes, homeowner’s insurance).
- You remain the owner of the home and are free to will it to your heirs.
- HECM proceeds are not subject to income taxes and do not impact Social Security retirement or Medicare benefits.
- The HECM is non-recourse, meaning you, your estate, or your heirs will never have to repay any more than the value of the home regardless of how much you borrow. FHA picks up any shortage if there’s not enough value in the home to repay the entire balance.
- The HECM program was created by the federal government and is insured and regulated by FHA.
HECM proceeds can be structured in the form of a monthly term or tenure “paycheck”, lump sum, line of credit, or some combination of all of these options. Reverse mortgage borrowers commonly use the proceeds to:
- Eliminate existing mortgage payments
- Eliminate other debts, such as credit cards and auto loans
- Finance home improvements
- Supplement retirement income
- Pay off medical bills
- Increase liquid retirement assets
- Set up a rainy day or emergency fund
- Take a vacation
Again, your obligations under the HECM program are simply to pay your real estate taxes, homeowners insurance, and live in the home as your primary residence. As long as you do these things, no monthly mortgage payment is required and the loan does not have to be repaid.
When Are Reverse Mortgages Not a Good Deal?
I think the best way to answer this question are reverse mortgages a good deal? is to first identify when a reverse mortgage might not make sense. There are a few scenarios I’ve run across in my years in this business where I’ve recommended a client avoid the reverse mortgage:
1) You wish to leave your heirs the maximum home equity possible. The reverse mortgage is designed to convert home equity into cash, which means your loan balance increases over time. Naturally, this means your home equity also decreases. If your goal is to leave the most home equity to your heirs that you can, then avoid the reverse mortgage.
2) You plan to move in the near future. There’s no limitation on selling and no prepayment penalties, but the reverse mortgage is better suited for homeowners who don’t plan to move anytime soon. A reverse mortgage often doesn’t make sense as a short-term solution because of closing costs and the effort that goes into qualifying. If you know you’ll be moving within the next few years, it’s probably better to avoid a reverse mortgage for now. You can always get one once you’re settled into your new home.
3) You need a relatively small amount of money and will pay it back quickly. Are reverse mortgages a good deal if you only need a relatively small amount of money, such as a few thousand or tens of thousands? Probably not. A better idea might be a home equity line of credit (HELOC), which can be faster, cheaper, and easier to obtain (as long as you’re well-qualified). Again, a reverse mortgage often doesn’t make sense as a short-term solution because of closing costs and the effort that goes into qualifying. If you do choose a HELOC, be sure to pay it back before the end of the draw period to avoid some big potential headaches. HELOC payments can increase significantly at the end of the draw period.
4) You have a disabled person living in your home. If you have a disabled person living with you who can’t take care of themselves, a reverse mortgage could force them to move out of the home if something happens to you. If you wish for them to continue living in the home after you die, you may want to avoid a reverse mortgage unless you’ve already provided a way for them to repay the loan upon your passing. Again, the reverse mortgage has to be repaid in full once the last borrower permanently leaves the home. If it isn’t repaid, HUD requires the lender to sell the home to pay back the reverse mortgage.
5) Your home is in bad shape. A HECM likely won’t be workable if your home is in poor shape. A reverse mortgage is not a rehab loan and FHA has certain minimum standards your home must meet for it to qualify. If your home is in bad shape, a hard money or rehab loan might be a better solution. You’ll have a monthly payment, but you may be able to refinance the rehab loan into a reverse mortgage later (as long as you still have an adequate equity position in the home). For more information about minimum home standards, feel free to check out the relevant portion of the FHA lending guide here.
6) You plan to get married in the near future. A new spouse is not automatically “grandfathered” into the protections and benefits of an existing reverse mortgage. If the reverse mortgage is only under your name, your spouse will have to settle up the reverse mortgage balance or move out of the home if something happens to you. If you know you’ll be getting married soon, it’s probably better to get the reverse mortgage done once you’re married.
So, are reverse mortgages a good deal? Well, if none of the above scenarios apply to you, then they might be. If it would be beneficial for you to be able to access that hard-earned “savings account” called home equity, then a reverse mortgage might not only be a good deal, it may be a phenomenal opportunity for you.
When Are Reverse Mortgages a Good Deal?
Think about your home’s equity for a moment. What can you use it for? What practical impact does it have on your life? Whether you have a dollar or a million dollars worth of home equity, how does it benefit your daily life in a real and tangible way?
If you’re retired and have no plans to sell your home, your home equity is pretty much just a number on paper. It might be a very nice looking number, but it has no tangible impact on your retirement lifestyle. After all, you can’t take your home equity to the store to buy groceries or use it to book a plane ticket to see your grandchildren.
Case in point: there are seniors right now living in paid off homes worth more than a million dollars in the San Francisco Bay area that are barely scraping by on Social Security. They’re technically millionaires, but they can barely afford to pay the light bill!
So, you busted your tail for decades, made mortgage payments month in and month out, kept up with your property taxes, fixed things when they broke, and maybe even upgraded your home a bit. Maybe you got lucky and your home even went up in value since you bought it.
Why not put that otherwise “useless” equity to work to live a better and more financially secure lifestyle in retirement?
Perhaps you can add to your income, supplement your available retirement assets, pay off some bills, or eliminate a burdensome mortgage payment.
That’s what the HECM reverse mortgage does.
Are Reverse Mortgages a Good Deal for You?
I think the answer to the question are reverse mortgages a good deal? comes down to this: does the reverse mortgage improve your financial situation? Does it make your life better? If not, then it’s definitely a bad deal.
However, if a reverse mortgage puts you in a better financial position and you don’t fit into the scenarios I listed above, then it may benefit you. If a reverse mortgage means you can live a better and more financially secure lifestyle in retirement, then it’s definitely not a bad deal. In fact, it could be a phenomenally good and life-changing opportunity for you.