Reverse mortgages have become a financial tool often mentioned, but rarely explained in detail. Individuals consider this type of financing for a variety of reasons, including making modifications or improvements to their home and generating improved cash flow for day-to-day expenses. This financing program allows a borrower to take a first mortgage against their property with proceeds of the loan delivered as regular payments, a lump sum or a combination of both. For some, this is the best way to continue to own their home, while for others; another option may make more sense.
A borrower must be 62 years or older and must be the owner occupant of a 1-4 family dwelling or approved condominium. There is no credit examination, however, the individual must take part in a government approved financial counseling session. The maximum amount of the reverse mortgage will be 80% appraised value minus the current mortgage, if any. Customary mortgage origination costs such as mortgage tax, legal and document fees are charged along with additional fees in the neighborhood of 4% of the mortgage amount. In addition, a service fee of $25 may be added monthly to the balance.
We normally think of paying down a loan amount over a period of time….the opposite occurs here; the size of the debt grows with interest over a period of time. The full amount of the outstanding balance is due on sale, upon death of the borrower or within 12 months of the borrower’s moving date to another residence.
If the sale price exceeds the amount due, as you would expect, the borrower gets to keep the proceeds. In the event the amount due of the reverse mortgage exceeds the sale price, a special procedure called a “short sale” is required. This can occur if, for instance, the value of the real estate has dropped since the reverse mortgage was started. A short sale procedure is governed by federal regulations and includes a new appraisal and activation of a claim against the shortfall insurance paid for by all reverse mortgage borrowers when they first take out their loans. There is no further action against the borrower or their estate.
Only the individual can determine if this financing tool makes sense to them. Key questions to explore with a trusted advisor are: How much cash could you realize if you sell and what is a conservative estimate of what you could safely earn on that amount? What would it cost to buy or rent a different place to live that may more closely meet your needs? Are there modifications that you can make to your existing dwelling that would increase your ease of living there for an indefinite period of time?
The most important thing to do before doing anything is in depth examination of your situation with knowledgeable people who have your best interest as their priority.