Are reverse mortgages expensive? Compared to what?
Besides the myths, misconceptions, and media misrepresentations of reverse mortgages, one of the most common criticisms of the loan is that they’re too expensive. To be fair, the federally insured Home Equity Conversion Mortgage (HECM) certainly has substantial upfront costs, most significantly the Upfront FHA Mortgage Insurance Premium (UMIP). The maximum upfront FHA premium for an HECM could be as high as $22,996.50 for a home appraised at $1,149,825 (the current HECM limit) or higher. The real question is “HECMs are expensive compared to what?” A recent article from the online Canadian media outlet The Globe and Mail entitled Retirees in debt have found an expensive way to get relief grabbed my attention. This article is accurate and fair, but it does bring to mind the need for a discussion of the upfront and ongoing costs of reverse mortgages compared to the unique benefits the loan can provide. The real question is that HECMs are expensive compared to what? To answer this question let’s examine the costs or consequences of being cash flow constrained in retirement. Below are just a few examples. The Consequences of lacking cash flow in retirement Avoiding medical appointments or foregoing medications risking a more serious disease or condition. The emotional toll of financial distress can lead to depression, hopelessness, or in some cases even suicide. The inability to keep up with inflation where Social Security or other retirement accounts fall short. Becoming a financial burden on adult children who step in to help an aging parent meet their living expenses. Shortening the lifespan of retirement account balances by taking larger systematic withdrawals to meet expenses. Falling behind on property taxes (with an existing traditional mortgage) and risking foreclosure. Being unable to pay homeowners’ insurance premiums and risking potential foreclosure from the lender. Having to work far beyond your intended retirement age. Being unable to afford to travel to see children, grandchildren, or close friends. The lack of funds to make needed repairs and maintain the home reduces the property’s value. Having to drive an unreliable vehicle. Being unable to purchase healthful food instead buying more affordable but less nutritious food items. Being saddled with an ongoing mortgage payment only to pass the home onto children who may squander the money they inherit. A generally lower quality of life. Certainly, reverse mortgages are not a panacea for every older homeowner, but their upfront and ongoing costs are buying something intangible- peace of mind. The calculus of one’s desired quality of life in retirement compared to the costs inherent in a reverse mortgage should be the centerpiece of the decision-making process. For some, the question is (as one reverse mortgage professional aptly said) ‘What’s your Plan B?’ by Shannon Hicks
Are you looking for ways to increase your cash flow in retirement?
If you own your home (or most of it), a reverse mortgage may be able to help. It can eliminate your existing mortgage payment and generate a regular source of income. However, there are a few factors that might deter you. That’s why it’s beneficial to fully understand how reverse mortgages work. Here’s a closer look at reverse mortgages, the pros and cons, and when one might be a good idea. What is required for a reverse mortgage? Most reverse mortgages are Home Equity Conversion Mortgages (HECMs) backed by the Federal Housing Administration (FHA) and originated by FHA-approved lenders. To qualify, you’ll need to meet a few requirements, including: How is a reverse mortgage repaid? Unlike traditional mortgages, reverse mortgages don’t have regularly scheduled payments. The full outstanding balance is due when certain events occur, including if you: In most cases, reverse mortgages are paid off by selling the home or handing the title over to the lender. However, the balance can also be refinanced or paid off by other means (e.g. savings, inheritance, etc.). What can a reverse mortgage be used for? You can use the funds you receive from a reverse mortgage for any purpose, such as to buy groceries, make home improvements, or pay bills. Retirees typically use them to supplement their Social Security and other retirement income. If you could use the extra cash that a reverse mortgage frees up then it’s worth exploring your options. What does it cost to apply for a reverse mortgage? Most lenders won’t charge you to apply for a reverse mortgage. However, be prepared to pay the fees for your mandatory counseling session and your home appraisal. Additionally, if you get approved and decide to move forward, you’ll have to pay closing costs and may be charged origination fees, service fees, and more. How much can you borrow with a reverse mortgage? The amount you can borrow, also known as the net principal amount, is based on your age, home value, interest rate, and borrower costs. When you apply, your lender will calculate it for you. Reverse mortgage pros and cons While a reverse mortgage can provide various benefits, it also has a few potential drawbacks. Here’s a summary of the pros and cons. Pros Cons Is a reverse mortgage right for you? Whether a reverse mortgage is right for you or not will depend on a few factors. First, consider how long you plan to stay in the home. If you don’t intend on moving, a reverse mortgage can be a good fit. However, if you do want to move in the future, your outstanding balance will become due which may require you to sell the house. Additionally, if you want to pass your home on to an heir, a reverse mortgage will make that more difficult. They’ll need to pay off or refinance the outstanding loan balance at the time of your passing. Other critical factors to consider are the costs to get the reverse mortgage and if the loan will impact your government benefits. While a helpful loan product in some situations, reverse mortgages are specific to the individual homeowner’s personal financial situation and preferences. Be sure to weigh the pros and cons carefully and share any concerns you have during your mandatory counseling session. Consider cash-out refinancing, too If you think you may benefit from a reverse mortgage then it helps to be aware of cash-out refinancing, too. Once familiar with both options you can weigh the pros and cons to accurately determine which is better for you. With a cash-out refinance you take out a new mortgage loan for an amount larger than your existing loan. You then use the new one to pay off the old one. You receive the balance (the difference between your old and new mortgage) as cash. Most lenders will allow owners to take out up to 80% of their home’s value so, depending on how much of your loan you’ve paid off, you could potentially get hundreds of thousands of dollars back. You can use those funds as you see fit. If this sounds like something you could benefit from then reach out to us today and we can answer any questions you may have and help guide you toward a plan that works for you.
Why a reverse mortgage may be worth it for seniors right now
It’s never too late to explore ways to make extra money. With so many ways to make passive income and multiple side jobs, it can be simple to make additional income. For seniors, however, many of whom rely upon a tight budget made of savings and Social Security, their extra cash options may be limited. Fortunately, there is a safe and reliable method to explore: reverse mortgages. Seniors aged 62 and older who have paid down all or most of their mortgage can leverage their existing homes by having a lender pay them (instead of the opposite, hence the “reverse” title). This can take the form of monthly payments or it can come in one lump sum. By using this accumulated home equity, seniors can easily supplement their income — and they will only have to pay the money back when they sell their home or die. And right now may be a particularly opportune time to pursue this option. Below, we’ll break down three reasons why a reverse mortgage may be worth it for seniors right now. Here are three compelling reasons why a reverse mortgage could be worth it for seniors today. Borrowing costs are high While inflation has steadily cooled from a 40-year high in June 2022, interest rates have remained high, with the benchmark interest rate range surging to its highest point in 22 years last summer and remaining there ever since. That’s caused rates on everything from mortgages to credit cards to personal loans to rise in tandem, making borrowing especially expensive right now. If you’re coping with high interest debt in this climate — and don’t want to consider debt relief options as an alternative — then a reverse mortgage could be an attractive option. Depending on how much of your home you’ve paid off, you could be looking at a substantial amount of equity to tap into right now, which can then help you pay down your existing, expensive debts. Relief may be delayed To lighten expenses, today’s interest rates need to come down. And while hope for relief was high at the start of 2024 it’s significantly dimmed since then thanks to a series of disappointing inflation reports. The latest, for February, showed inflation rising in the month to 3.2% — an increase from January and more than a full percentage point above the Federal Reserve’s target 2% goal. Against this backdrop, at least one Fed official recently argued that interest rate cuts may not be on the horizon for this year either. That delayed relief will hurt many, leading to a search for alternative ways to make ends meet. A reverse mortgage could be one of them. It may be better than the alternatives If you’re a senior in need of extra cash, it can be helpful to research all alternatives. Unfortunately, right now, many may not be as advantageous as a reverse mortgage. Credit card interest rates are hovering around 20% right now while personal loans are in the double digits, too. Home equity loans and home equity lines of credit (HELOCs) can be beneficial for the right homeowner but since the home is used as collateral in those circumstances, it can be dangerous without a clear repayment plan. But reverse mortgages don’t come with high rates — or the risk of losing your home. You’ll simply need to repay what you borrow if you sell the home or have a loved one do so after you have died. The bottom line With borrowing costs elevated, the prospect of relief uncertain and multiple, less-advantageous financing options, many seniors may find a reverse mortgage to be a viable way to boost their income — and pay down high-interest debt. While this option is only available for those 62 and older and will heavily depend on how much of your home has been paid off, it could be worth exploring for select homeowners right now. Contact me to get started today. By Matt Richardson