“What goes up must come down,” or so the saying goes. And, along the same lines, what goes forward must also go in reverse.
In regard to “forward” mortgages, “reverse” mortgages are their own special kind of thing.
If you are wondering about reverse mortgages, just remember the big takeaway is that some are good, some are bad, and you need to carefully read the paperwork before signing on the dotted line.
And if it is your parents who are considering a reverse mortgage and you’re going to be helping them deal with their finances as they age, this is critical for you and for them.
Reverse Mortgages – Good and Bad Reputations
When reverse mortgages first became popular, banks writing these loans grew rapidly… So did some con artists who took advantage of an aging population desperate to hold on to their homes, or medically incapable of understanding the consequences of the monthly payment they’d receive.
This was good only for the scammers.
Much legislation has been written to remedy these kinds of situations created by scammers. To be safe, you or your parents can apply here for an FHA reverse mortgage.
You may think you can get a better deal with a non-FHA reverse mortgage, but going the FHA route will provide confidence that you’re on the right path, and that’s worth the peace of mind it affords.
Let’s Look at How Reverse Mortgages Work
Reverse mortgages are designed to help people at retirement age afford to stay in their homes longer. This generally means that mortgage payments stop, and there might even be some form of payment to the homeowner.
If your grandmother shows up at the next family gathering in her brand new convertible, it might be a good idea to ask her about the terms of her reverse mortgage. Some are genuinely helpful and decent, but others…not so much.
The good news today is that reverse mortgages are heavily regulated by the government, so it’s much harder for scammers to take advantage of older people who may already be having money problems.
These reverse mortgages don’t even require a credit pull or decent credit. You just need a home that is owned free and clear, or has a significant amount of equity, and be 62 or older.
You will pay some upfront fees and be required to complete HUD-approved counseling (which requires a separate fee.) These will help you determine if you are a good fit for a reverse mortgage.
In the event of your death, your heirs will have the option to redeem the property from the reverse mortgage lender by paying off the borrowed amount in full. This can also be achieved by securing a new traditional “forward” mortgage.
Reverse Mortgage Payment Options
The main reason elderly homeowners take out a reverse mortgage is for the money that comes back into their pocket. The borrower can choose the payment plan they prefer.
The borrower will essentially have three options:
1. taking a lump sum
2. taking a monthly payment
3. using it as a line of credit
There are also ways to mix and match these options. You might want to take a percentage as a lump sum for that flashy convertible, and then take the rest as a line of credit to use to feed the gas tank.
For many seniors, a reverse mortgage will allow them to age in place without fear of losing their home. They will of course need to keep up with the property taxes and insurance.
A reverse mortgage can be a great option as long as the source of the funds is fully vetted, the paperwork is in order and carefully read and understood, and there is a strategic plan in place to make the money last as long as possible.