Advertisers attempt to make you think they are all that and then some while the media and some financial advisors make them sound like they are a horrible way to go. Let’s see if we can help you decide for yourself.
Reverse mortgages are for homeowners 62 years or older that either have their home paid for or have a mortgage balance 50% or less of the value of the house. Reverse mortgages work opposite of traditional loans. On traditional loans you make payments every month on reverse mortgages the bank pays you monthly, or in a lump sum, or a line of credit or a combination of those options. The bank does NOT own the house you maintain title just like any other loan.
As long as you keep your property taxes and home insurance paid, keep the house maintained, don’t change who is on title, rent out the house, or try to get another loan on the house the reverse mortgage requires no repayment until you either die or move out of your house for more than 12 months. The loan can be paid off by selling the house or liquidating other resources to pay it off and if the loan exceeds the value of the home you can just let the bank take the home. You or your heirs are never obligated to pay back more than the house sells for.
The costs to do a reverse mortgage include your typical mortgage costs including appraisal, title, lender fees, recording fees, closing fees. The lender is generally compensated through the paying of points which are capped at two. Lenders can also be compensated through a higher interest rate via a higher margin on the adjustable rate mortgage. So you can lower your upfront costs by accepting a higher rate just like in traditional mortgages. The last cost is a 2% mortgage insurance premium.
The mortgage insurance premium pays for all the features this loan has that a traditional mortgage does not have. When that is taken into consideration that fee insures the very things that make a reverse mortgage so attractive. The interest rate you pay includes a .5% annual mortgage insurance premium.
One of the biggest issues many have with reverse mortgages is that the interest accrues daily and does compound. Which makes perfect sense since one is not paying interest payments. If you stay in the house for a long period of time and house values don’t appreciate much or at all then there is a very good chance you will owe more than your house is worth, which would mean your heirs would likely let the house go back to the bank. If appreciation keeps up then when the house would be sold, the loan is paid off and the remainder would go to you or your heirs.
All in all reverse mortgages are NOT too good to be true. They do exactly what they say they do, but there are some downfalls to them, which we have begun pointing out. Reverse mortgages can help seniors in Kansas City and it is up to you to find out if one would be prudent for you in your situation.