A Reverse Mortgage can allow you to access your home’s equity as needed for various expenses. You can also use it as a line of credit, sell investments, or even guide your market timing. But not all financial planners recommend reverse mortgages. One of them, Howard Hook, is a certified financial planner and senior wealth advisor with EKS Associates in Princeton, New Jersey. Hook’s client recently took a reverse mortgage. Here’s what you should know before signing on the dotted line.
The Reverse Mortgage is a type of loan taken out on the equity in your home. Although you don’t have to pay the money back until you sell your home, you do have to pay the interest, which is much less than a traditional mortgage. This allows you to benefit from the increased value of your home sooner. It also allows you to access your funds earlier than you might with a traditional mortgage. The best Reverse Mortgages are zero-monthly fees, and you can withdraw as much as 10% of the available funds.
The Reverse Mortgage is one of the most popular loans for homeowners over sixty. It is insured by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. The government guarantees that the lender will meet their obligations. However, only federally approved lenders offer HECM loans. Reverse mortgage counseling is also required. The HECM program has strict guidelines for how much money can be advanced. The interest charged on an HECM loan is not tax-deductible until it is paid.
A Reverse Mortgage can be advantageous for borrowers who have equity in their home. The money received from a Reverse Mortgage is not taxed, and the borrowers can choose to receive it in lump sums, monthly payments, or in a line of credit. While the Reverse Mortgage can be advantageous for borrowers who need the money, they must continue to pay property taxes and insurance, and maintain the home. Without these payments, they risk losing their home to foreclosure.
The costs associated with a Reverse Mortgage are often higher than the fees involved with a traditional mortgage. Reverse Mortgage origination fees are usually capped at $6,000, but they may vary depending on the amount of money borrowed. Other fees can add up over time, resulting in higher debt and less equity. Servicing fees can run upwards of $35 a month. And, the interest on a Reverse Mortgage cannot be deducted from tax returns until the loan is paid off.
Reverse mortgages can be paid off sooner than expected. Reverse mortgages typically end when the borrower dies or moves out of the property. During this time, the heirs of the deceased person may have several options. The heirs may choose to sell the property and recover the balance on the Reverse Mortgage, refinance it with the remaining money, or give it back to the lender. However, the lender can make a claim against an insurer in the event the borrower is no longer alive to repay the loan.