Reverse mortgages are a strange duck. Instead of making payments to a lender as with a traditional mortgage, the lender makes payments to you using your house as collateral.
Until recently, the high fees associated with this type of mortgage made it only appropriate in special situations. Fees have come down such that the reverse mortgage is acceptable in a wider set of scenarios.
The way it works
At least one of the homeowners needs to be over the age of 62. The loan can be the only debt on your property, but the proceeds can be used to pay off a previous mortgage. Property taxes and homeowners insurance are still your responsibility.
A reverse mortgage entails an upfront fee of about 0.5% and has closing costs similar to a traditional mortgage. A credit counseling session is required.
The amount that can be borrowed varies and is partly based upon the age the youngest borrower (the older the borrower, the larger the loan) and the appraised value of the house. The maximum loan amount is approximately half the appraised value (with a maximum of $625,000). The loan does not have to be repaid until you leave the home, either through death or by moving.
Though the distributions can be structured in a myriad of ways, most loans are a line of credit. The amount that can be borrowed increases every year (due to the increased age of the borrower and presumed appreciation of the house).
As reverse mortgages only recently have become reasonably cost-effective, research into their use is limited. Studies show obtaining a reverse mortgage line of credit early in retirement can be advantageous. By not putting as much pressure on retirement funds, the probability of a “successful” retirement is greatly increased.
As with most financial changes, the pros and cons of a reverse mortgage need to be weighed to see if it fits your situation. The upfront costs, the anticipated length of homeownership, and legacy desires (i.e. inheritance) all play a part. We can help weigh these costs. See Our Service Offerings and let us know if we can assist in this, or any other, financial decision.