Reverse Mortgage Checklist: Big Questions to Ask if You Are Considering this Loan
Your house is your: Home. Heart. Hopes. Dreams. Legacy. Wealth. Future.
So, the decision to get a reverse mortgage is not something to take lightly. They can sound almost too good to be true but getting a reverse mortgage is a huge financial decision. So, how do you know if a reverse mortgage is right for you?
Try this personalized reverse mortgage suitability quiz. Or, here is a 7-question reverse mortgage checklist to help you make the right decision.
1. Do You Want to Stay in Your Home?
If you think that there is a chance that you will move from your home within the next five years or so, then a reverse mortgage is probably not for you.
However, if you wish to stay in your home for the rest of your life, then this is a product to consider.
2. Do You Want or Need to Improve Your Finances? Want More Financial Flexibility?
There are two types of homeowners who should consider getting a reverse mortgage:
A. The Financially Strapped: Are you struggling to pay the bills every month? Are you worried about medical expenses? Do you just need access to some money?
If you answered yes to any of these questions, then a reverse mortgage could have some very real benefits to you:
- The loan will pay off your existing mortgage (if you still have one) enabling you to eliminate all existing monthly mortgage payments — a reverse mortgage is not paid back until you pass on or permanently move out of your home. There are no ongoing costs associated with the loan although you must continue to pay taxes and insurance on your home. Eliminating mortgage payments may decrease your financial stress by improving your monthly budget.
- Many homeowners can also access additional cash to use however you like or need.
B. Homeowners Seeking Financial Flexibility: Not everyone who gets a reverse mortgage is struggling financially. A reverse mortgage can also be used to increase your overall wealth. Financial advisors are now recommending to some clients that they secure a reverse mortgage as a way to gain more financial flexibility.
Obtaining a reverse mortgage line of credit (an amount of credit extended to the borrower) early in retirement allows it grow in value if untapped. Having a reverse mortgage line of credit available may be a good idea for several reasons:
- It’s there if you need it, and the bank cannot pull the line of credit if your finances change.
- It grows over time (if untouched), so the amount of equity you can access becomes larger year after year.
- When the market isn’t performing, you can draw from your equity instead of liquidating investments. When the market is doing well, pay your line of credit back if you want to keep the balance low.
3. Are You Eligible?
Eligibility requirements for a reverse mortgage include:
- Age: At least one title holder must be 62 years of age or older.
- Home Equity: Borrowers must be eligible for a loan amount sufficient to pay off all mortgages and liens on your property. A reverse mortgage must be the only loan on the property, and if the funds from the reverse mortgage don’t enable you to eliminate all other mortgages, then you will not qualify.
- The amount of money you can get from a reverse mortgage is determined by a calculation that takes into account the borrower’s age, current interest rates, and the total value of your property. The amount of money you can get from a reverse mortgage must be more than what you currently owe on your home.
- Ownership, residency and home type: You must own and live in the home with the reverse mortgage. In most cases second homes, apartment buildings and homes less than a year old are not eligible for a reverse mortgage. Some companies may accept 2-4 unit owner-occupied dwellings, along with some condominiums, planned unit developments, and manufactured homes. Generally cooperatives are not eligible.
- Financial considerations: You must be able to continue to maintain your home and pay all insurance and property taxes on the residence. This will be determined by a financial assessment during the loan application process.
4. Are Interest Rates High?
Interest. You have probably paid interest on all kinds of loans and you know that it can really add up.
However, paying interest on a reverse mortgages works differently than paying interest on most other types of loans. With mortgages and credit cards, you usually pay interest every month and try to get the loan amount to be lower. However, when you secure a reverse mortgage, you make absolutely NO monthly mortgage payments — not for interest or principle. Instead, you accumulate interest on any money that you use from the reverse mortgage loan. That money and the accumulated interest is paid back in one lump sum when the loan comes due.
As with other types of loans, the reverse mortgage will cost you less overall if your interest rate is low. Interest rates have been historically low over the past decade but experts predict that they may rise.
5. How Much is Your Home Worth Now?
The more your home is worth, the more money you could potentially borrow. Many regions of the country have seen home prices rise in recent years.
Get an estimate of your reverse mortgage loan amount using your home’s current value.
6. Have You Considered Alternatives?
Getting a reverse mortgage is not the only way to access your home equity to use in retirement. Consider the following options:
- Downsizing: Could you move to a less expensive residence?
- Selling Your Home and Renting: This can be a good option in some real estate markets.
- Renting Out Part of Your Home: Homesharing is growing in popularity as a way for older people to make ends meet and stay social.
7. What About Your Heirs?
Many people are concerned about what happens to a home with a reverse mortgage after they die. While a reverse mortgage does decrease your equity and can impact the overall value of your estate, you can still leave your home to your heirs and they will have the option of keeping the home and refinancing or paying off the mortgage or selling the home if the home is worth more than the amount owed on it. In addition, there can actually be estate planning benefits to a reverse mortgage.
However, if you are worried about the impact on your heirs, go ahead and speak with them before making this decision. You might be surprised by their opinions.
Is a Reverse Mortgage Right for You?
Many reverse mortgage calculators exist to help you estimate your loan amount or to assess whether you qualify for the loan or not. You can also take a Reverse Mortgage Suitability Test — a quick personalized quiz to help you determine whether the loan is something you should consider or not.