A reverse mortgage may first seem to be free money. Your lender grants you a loan amount with no monthly payments based on the amount of home equity you have. Yes, it’s a good bargain. Yes and no, I suppose. According to the Financial Industry Regulatory Authority, a reverse mortgage may be a beneficial financial instrument provided you handle the loan responsibly (FINRA).
- Before taking out a reverse mortgage, homeowners should research all the information.
- Reverse mortgages have the potential to have much higher interest rates, charges, and fees than other forms of mortgages.
- The Financial Industry Regulatory Authority (FINRA) advises looking into other reverse mortgage financing alternatives.
What Is a Reverse Mortgage?
Borrowers obtain a loan amount with a conventional mortgage, which they then pay back over time via regular monthly installments. With a reverse mortgage, borrowers are given a loan amount that may be paid back in a single sum, over time with regular monthly payments, or as a line of credit. A home equity conversion mortgage (HECM), which is supported by the Federal Housing Administration, is the most popular kind of reverse mortgage (FHA).To be eligible, borrowers must be 62 years of age or older.
When the borrower no longer resides full-time in the house, which must be their main residence, the reverse mortgage loan amount must be paid back. This could be as a result of the borrower selling the property, relocating for at least a year (for example, into a nursing facility), or passing away. In many cases, the borrower or their heir(s) sells the house to cover the remaining debt on the reverse mortgage loan.
What Does FINRA Say About Reverse Mortgages?
While acknowledging that a reverse mortgage may assist some homeowners stay in their homes, FINRA also advises homeowners to fully understand a reverse mortgage and consider all of their choices before deciding how to proceed.
Homeowners are specifically cautioned by FINRA that a reverse mortgage is not free money. The loan amount for a reverse mortgage will accumulate interest during the loan’s term, just as with conventional mortgages. As a result, the borrower or their heirs may be required to pay more than the initial loan balance when it comes time to repay a reverse mortgage.
Additionally, homeowners are warned by FINRA that the fees and charges associated with reverse mortgages may be much higher than those of a conventional mortgage, often amounting to as much as 4% to 8% of the entire loan amount. The amount of money you actually get from the reverse mortgage might be decreased if these fees and charges are included, just as with a regular mortgage. Additionally, the income from a reverse mortgage will be used first to the repayment of any existing mortgages for homeowners, which may result in the borrower receiving considerably less money than anticipated.
Another characteristic of reverse mortgages is that specific criteria must be met by borrowers in order to prevent default and the start of foreclosure procedures. These consist of:
Consider If and Why You May Need a Reverse Mortgage
Although many financial advisors and mortgage lenders suggest a reverse mortgage as a means to enjoy a pleasant retirement, FINRA advises homeowners to thoroughly consider their financial situation and assets before making a choice.
The following advice is provided to homeowners thinking about a reverse mortgage in a FINRA Investor Alert titled “Reverse Mortgages: Avoiding a Reversal of Fortune” (Investor Alerts are only accessible through FINRA via a free email subscription service):
- Examine and compare all your options—Are there any other, more effective methods to earn the additional money you need than a reverse mortgage? A home equity loan or a home equity line of credit (HELOC) may be available to you. Can you downsize and sell your house? Exist programs at the municipal, state, and federal levels to assist you in paying your taxes and bills?
- Understand the risk and be aware of all fees and costs—crucial It’s to learn how much a reverse mortgage would cost you if you have to pay it back before taking one out. This entails being aware of the interest rate, all expenses, and the size of any prepayment penalties.
- Understand how a reverse mortgage may affect your ability to get financing— A reverse mortgage may influence your eligibility for Medicaid and Supplemental Security Income (SSI), even if it has no effect on your Social Security benefits or Medicare eligibility. It can also be pertinent to any aid or security you might get if you have to check into a nursing home.
- Speak with a professional – Although the U.S. Department of Housing and Urban Development (HUD) mandates that all applicants for a reverse mortgage meet with a counselor who has been authorized by HUD, it’s crucial to get a second opinion from someone who is not involved in the transaction. This might be a reputable financial counselor, certified public accountant, or estate planning lawyer.
- Consider your options carefully before utilizing a reverse mortgage for investment— FINRA advises against using a reverse mortgage as an investment or to support an investment since doing so is, at best, a dangerous move.
What is a reverse mortgage?
You may get an income stream from a reverse mortgage depending on the equity in your property. It doesn’t demand monthly payments as a conventional mortgage does, and it doesn’t become due until you sell your house, vacate, or pass away.
Is a reverse mortgage a source of free money?
No. In addition to fees and charges that are more costly than with conventional mortgages, it accrues interest. When a reverse mortgage is due, a homeowner may wind up paying much more than the initial loan balance.
Does the Financial Industry Regulatory Authority (FINRA) say reverse mortgages are not a good choice for all homeowners?
No. The Financial Industry Regulatory Authority (FINRA) agrees that a reverse mortgage could be a wise choice for certain homeowners, but it warns them to make an educated choice based on the facts, such as the costs, the repayment terms, and the potential implications on their financial future.
The Bottom Line
Reverse mortgages may be a useful financial instrument for senior homeowners who need assistance with housing costs and daily living expenditures. Although it may not be the greatest option, FINRA urges homeowners to do their own study into all of the specifics and expenses associated with a reverse mortgage and consider alternatives before deciding whether it is the best option for them.
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