Reverse mortgage loans for seniors - pros and cons to consider before applying

Most Reverse Mortgages are HECMS (Home Equity Conversion Mortgages) a type of Reverse Mortgage which requires HUD (Department of Housing and Urban Development) counselling to ensure that your interests as a retiree are safeguarded. They are insured by the Federak Government and have restrictions on the amount borrowed etc.

To opt for reverse mortgage, you need to

• Be at least 62 years of age
• Own your property
• Occupy your property as the primary residence
• Participation in a consumer information session given by an approved HECM counselor

The mortgage amount is based on the age of the youngest borrower.

Reverse mortgage is about unlocking the equity in your house without making any monthly payments. You can receive a loan as a lump sum, as a monthly payment, line of credit or a combination of all three. The repayment is deferred until you no longer reside in the house.

Sometimes senior retirees have a hard time meeting their expenses if they haven't been adequately covered by health insurance. Inflation makes everything expensive and without an active income coming in, life can be tough. Meanwhile the value of the primary residence may have appreciated considerably over the years. In such a situation, many retirees consider opting for reverse mortgage and in particular,Home Equity Conversion Mortgages.
 
Reverse Mortgages are non-recourse debt financing. This means that a person who opts for a reverse mortgage will never owe more than the value of the home. Reverse Mortgage proceeds are tax free. The full loan can be prepaid at any time without incurring any penalties. So if you get some unexpected income and want to pay off the mortgage loan you can do so.

A few things to keep in mind

Closing costs apply for reverse mortgages and you should find out from any lender who's advancing you a reverse mortgage loan what the exact closing costs will be. Interest, origination fees and points can add up.

Borrowers are responsible to pay real estate taxes, conventional homeowners insurance and home repairs. The borrower also has to pay for mortgage insurance.

 If you're wondering why a mortgage insurance is necessary, it's because the real estate market could dip anytime and in such a situation, the value of the property may not be enough to repay the loan. The mortgage insurance would cover the deficit then. If you're 62 when you opt for the reverse mortgage and you live to be 90, the accrued interest and the loan would add up to a very large sum, possibly larger than the value of the home. This is when mortgage insurance would protect the interest of the lender.

The lender recovers only what is owed to them if the value of the home is higher than the amount due. The rest goes to to the heir of the loan applicant.

Refinance Mortgage v/s Reverse Mortgage Loans

Senior retirees may sometimes do better with trying to refinance the loan of their home rather than opt for reverse mortgages. If you have a house that is valued at $250,000 and you opt for a 30-year old loan of $100,000 at 6% interest, you may pay less than $600 a month as your repayment. There's no mortgage insurance premium to pay because the value of your home is substantially higher than the loan you've opted for. So you save money. This is assuming you qualify for a refinance mortgage because many seniors are retirees with no active income and ineligible for mortgage loans.

In case of reverse mortgages, the older the applicant, the more attractive he is to the lender. An 80-year-old man applying for a loan is preferred compared to a 62-year-old because in case of a younger person, the bank may have to wait much longer before the loan is repaid.The interest rate is usually linked to the market rate. So there isn't a huge scope for profit there.  Closing costs make loans more attractive in the short term and the lenders would rather lend for shorter periods to more applicants.

Depending on where you live getting a reverse mortgage loan could also affect your Medicaid. Loan proceeds are an asset as per Medicaid while untapped home equity isn't considered an asset in determining Medicaid eligibility. THis is assuming that it is owner-occupied. Recent federal legislation has determined the home-exemption ceiling at $500,000.

Some people are sentimental about their home and don't want to part with any portion of its equity, wanting to leave it for their heirs. Some others take a more pragmatic view and prefer to live more comfortably. There is no right way or wrong way. It's really a personal choice. Just makes sure to read the fine print when you do opt for a reverse mortgage.

This article refers to products which may be available only within the United States.