Anyone who considers themselves a senior, which I certainly do, at some point will probably have considered a reverse mortgage. It’s not a conventional mortgage designed for the majority of home purchasers but rather a vehicle for senior homeowners to tap into their home equity.
What exactly is home equity? Home equity is the amount of your home that you actually own. Specifically, the equity is the difference between what your home is worth and what you owe your lender or lenders. Don’t confuse it with “mental equity,” which is a term sometimes used in real estate where sellers think they know what their property is worth.
Seniors who are 62 or over can apply for a reverse mortgage, releasing some of the equity in their property. With property values increasing in the past three to four years, seniors who have owned their homes for a long time are considering reverse mortgages with an eye to staying in their homes. Homeowners are still responsible for paying property taxes, insurance and maintenance; however, the repayment of the loan is deferred until the homeowner dies, sells or moves out of the home.
In addition to being 62 or over to qualify, you also need to have enough equity in your home. The loan works by making payments to the borrower based on a percentage of the equity that has been built up in the home. The factors that determine the loan amount include your age, the value of your home, the interest rate and the FHA mortgage limit, $1,089,300 as of this writing.
The obvious benefit is that you can continue to live in your home and retain the title. The proceeds of the loan are generally tax-free cash, so you can use the money as you see fit for improvements and everyday living expenses. You choose the disbursement option; lump sum, monthly payout, quarterly, etc.
The primary drawback of reverse mortgages is that the loans are generally more expensive than other financial products. The balance of the loan increases over time as does the interest on the loan and the fees associated with the loan, eating into any home equity that is left.
If this is something that you might consider, the first thing you should do is attend a counseling session from a licensed third-party counseling agency. The Department of Housing and Urban Development (HUD) maintains a list of counselors available in Florida.
Next, research and identify companies that specialize in reverse mortgages. Factors to look for when evaluating companies are years in business, number of products offered, customer service availability, state licensing, Better Business Bureau (BBB) ratings and the inclusion of a mobile application. Once you have found a company you’re comfortable with, discuss what options may be available to you as far as qualification, timeline and any other questions you may have.
When the application is completed, the process is similar to a traditional mortgage application. The loan will go to an underwriter and appraiser and once approved, a distribution is made.
No matter what age you are, it’s tempting to look at all the equity you have in your home and convert it into a “piggy bank.” Like any loan where you reduce your equity, whether it’s a home equity loan, refinancing your current mortgage or a reverse mortgage, always remember that the funds you withdraw are real money and analyze what the effect of that could have on your future. Get professional advice and good luck.
