Reverse mortgages pose risks beyond losing homeownership, including eroding home equity, accruing high fees, and limiting inheritance. Interest compounds, potentially leading to significant debt. Borrowers must maintain taxes and insurance or risk foreclosure. Consider these factors carefully.
Suze Orman's opinion on reverse mortgages
She has spoken out against these loans on numerous occasions, warning that they can be a risky financial decision for many older Americans. One of Suze's main concerns with reverse mortgages is that they can be incredibly expensive.
If your reverse mortgage loan is in default and you've received a notice that the loan is “due and payable,” you may sell your home for 95 percent of its appraised value.
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
Selling a house with a reverse mortgage isn't as simple as selling a home with a traditional mortgage — but it can be done with a little planning. With a reverse mortgage, you borrow against the equity in your property to receive cash upfront or a stream of monthly payments.
It's a loan with some unique attributes, but the lender does not own the home. You, as the owner, retain the title on the property and the loan does not need to be repaid as long as you live up to the terms of the loan, which typically include: Paying property taxes.
A reverse mortgage usually must be repaid when the borrower moves out for 12 consecutive months or more, such as into a nursing home or other care facility. If the borrower is married, their spouse can remain in the home under certain conditions.
The 60% Utilization Rule
Home equity conversion mortgage HECM borrowers may only take the greater of 60% of their total available equity or the total amount of their mandatory obligations plus 10% in the first payout.
Alternatives to a reverse mortgage include home equity loan, home equity lines of credit, and cash-out refinances. These financial products can help you tap the equity in your home to use as cash for other purposes.
Modified Term Reverse Mortgage Payment Plan
You can avoid running out of money with this plan if you use your line of credit carefully. If you exhaust the line of credit early on, you may have no equity left to draw on at the end of the term.
A reverse mortgage may be a good idea if:
You and your spouse/partner are both 62 or older. You are in a strong financial position. You are able to physically maintain your home.
The amount of money you can get from a reverse mortgage usually ranges from 40% to 60% of your home's appraised value. The older you are, the more you can receive because loan amounts are based on your age and current interest rates.
Who is not a good candidate for a reverse mortgage? A reverse mortgage is a questionable proposition if you have sufficient income to pay your bills or are willing to sell your home to tap into the equity. If that's the case, it may make more sense to just sell it and downsize your home.
A reverse mortgage agreement does not require a homeowner to give up the title to borrow money. If you currently own your home and set up a reverse mortgage, you or an heir will only give up ownership of the property if the terms of the agreement are breached.
How Do Reverse Mortgages Work? Most require no repayment for as long as you live in your home. They are repaid in full when the last living borrower dies, sells the home, or permanently moves away. Because you make no monthly payments, the amount you owe grows larger over time.
No. When you take out a reverse mortgage loan, the title to your home remains with you. This webpage has information about HECMs, which are the most common type of reverse mortgage.
You remain eligible, whether or not you have a reverse mortgage. Social Security isn't typically affected by a reverse mortgage loan because it is a government-based program, primarily based on contributions you and/or your spouse made during your years in the workforce.
You're still responsible for paying property taxes and insurance, and if you default on your property taxes, you could lose your home to tax foreclosure. A reverse mortgage lender can foreclose on the home if you're not living in it for more than 12 consecutive months due to health care issues.
Reverse mortgage loans typically must be repaid, usually by selling the home, when the last borrower dies. However, non-borrowing spouses may be able to stay in the home if they meet certain criteria. Most reverse mortgages today are Home Equity Conversion Mortgages (HECMs).
Typically, a reverse mortgage doesn't need to be paid back until you move out of the home or pass away. At that point, you or your heirs will pay back the amount borrowed as well as interest and fees accumulated over time.