Reverse mortgages allow you to hand over the equity you have in your home in exchange for money. You work with a service provider that will handle your reverse mortgage terms and conditions and provide you with a specific reverse mortgage payment plan. There are positives and negatives with even the best reverse mortgage companies (opens in new tab) and very specific things you need to consider before you start. To ensure that you know exactly what you’re getting into, this list covers ten things that you should know about reverse mortgages before you start.
1. Only certain people are eligible
Reverse mortgages are only granted to people aged 62 years and older and who have a sufficient amount of equity in their homes. Service providers will also have their own eligibility requirements – some will be stricter than others. To find out if you’re eligible for a reverse mortgage, visit the National Reverse Mortgage Lenders Association (NRMLA (opens in new tab)) for more information.
2. Counseling is mandatory
The Federal Housing Association’s Home Equity Conversion Mortgages (HECM) guidelines require that a ‘prospective (opens in new tab) borrower must first meet with an exam-qualified, independent third-party counselor approved by the U.S. Department of Housing and Urban Development (HUD (opens in new tab))’. If your service provider doesn’t ask you to do this, it could be a warning sign. This counseling is important for your protection as it ensures that you are fully informed and prepared for the reverse mortgage process and the financial implications it presents. You can download the Preparing for Your Counseling Session form here (opens in new tab) and you can find out more about alternative forms of financial aid right here (opens in new tab).
3. Assess all the ongoing costs
There are costs that are associated with your reverse mortgage and these can increase every year. You must be aware of how these will affect your loan, your takeout funds and your finances before you get a reverse mortgage. Some service providers have fairly rigorous ongoing costs that will increase year-on-year, while others have higher interest rates or upfront costs. Create a spreadsheet that outlines everything from your origination fee to your counseling fee to your assessment and closing fees. If you know exactly what to expect, you can see how beneficial the loan will be to you in the long term.
Remember, many reverse mortgage loans stipulate that you are to remain responsible for house taxes, maintenance and insurance on top of these fees so the costs do add up.
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4. Know your TALC
TALC is your Total Annual Loan Cost and this is what you will be paying annually on your reverse mortgage. This does vary dependent on interest rates you’ve chosen, package and service provider, but it can go up each year which means you need to know exactly how it works, how it is worked out, and what requirements you need to meet to ensure you remain compliant.
5. Understand your options
You may not actually need a reverse mortgage to achieve your very specific life goals. In some cases, you may qualify for a completely different kind of help from a different agency and it will cost you less and help you far more. Contact your local Area Agency on Aging to find out if your plans are covered or supported by what they have on offer first.
The same applies to the different types of reverse mortgage. When you’re assessing which loan type to take out, compare them all first to see which ones are actually a false economy and which will help you achieve your goals. Pay close attention to the fine print, especially if the loan is specialized or has lower eligibility requirements, and remember to constantly assess the fees
6. Customer reviews are important
Because you can’t necessarily ask everyone in your neighborhood whether or not they’ve taken out a reverse mortgage, and with whom, take a look at customer reviews on sites like Consumer Affairs (opens in new tab), Better Business Bureau (opens in new tab) and Consumer Reports (opens in new tab). If a company consistently receives shoddy reviews from outraged customers, perhaps don’t put them on your shortlist.
7. Check their accreditation
The Better Business Bureau, the NRMLA, the FHA, and the HUD are all committed to keeping people safe. Check any company’s accreditation before you hand over your hard-won home equity. These organizations offer you in-depth support and insights into reliable reverse mortgage providers, costs, processes and warning signs. Use them diligently to ensure a safe and profitable reverse mortgage agreement.
8. Know the drawbacks
Alongside the ongoing fees and interest rates you have to pay, there are some other things that are a tick in the negative column for reverse mortgages. The loan repayment has to be made at some point and this can result in you losing equity and profit in the long term. If you fall ill and are not in the property for more than 12 months, then the loan will have to be repaid. The same applies if you don’t live in the property for longer than six months. You will also pay your housing costs, lose weight on your children’s inheritance, and you won’t get an annual tax deduction.
9. Know the benefits
Of course, there are benefits to owning a reverse mortgage. You don’t need to make monthly payments, you can use the money to pay off debt, healthcare expenses, living expenses or anything else that may be an urgent consideration in your life right now. You can use the funds to build out a dream retirement or to enrich the value of your property, and you can stay in the home until you sell or pass away.
10. Be prepared
The costs associated with a reverse mortgage are the biggest concern. These hit hardest at the end of the month when ongoing costs become due, and they can cripple you if you’re not prepared. This is one of the best examples of forewarned is forearmed – if you know exactly what you’re getting into, then you can really enjoy the benefits that a reverse mortgage has to offer.