According to the NRMLA, the cash a homeowner receives from a reverse mortgage may count as assets when receiving or applying for government assistance programs such as Medicaid. Not qualifying for government help can cause additional financial hardship for a couple who owns the home if one of the owners must go into nursing care. A reverse mortgage gives the lender the primary claim on the home after the last homeowner passes away.
Since interest on the loan adds to the loan balance, the longer the reverse mortgage is outstanding, the greater the amount to be paid off and the less the heirs will get out of the home equity. It may make more financial sense for the heirs to help out with the homeowners' expenses to protect their future inheritance.
Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch. Plaehn has a bachelor's degree in mathematics from the U.
Air Force Academy. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. A reverse mortgage is a type of mortgage loan that's secured against a residential property that can give retirees added income by giving them access to the unencumbered value of their properties.
When homeowners die, their spouses or their estates would customarily repay the loan. According to the Federal Trade Commission , this often entails selling the house in order to generate the needed cash. If the home sells for more than the outstanding loan balance, the leftover funds go to one's heirs. That is why borrowers must pay mortgage insurance premiums on reverse home loans.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. Taking out a reverse mortgage could complicate matters if you wish to leave your home to your children, who may not have the funds needed to pay off the loan.
While a traditional fixed-rate forward mortgage can offer your heirs a funding solution to securing ownership, they may not qualify for this loan, in which case, a cherished family home may be sold to a stranger, in order to quickly satisfy the reverse mortgage debt.
If you have friends, relatives, or roommates living with you who are not on the loan paperwork, they could conceivably land on the street after your death. Those boarders may also be forced to vacate the home if you move out for more than a year because reverse mortgages require borrowers to live in the home, which is considered their primary residence.
If a borrower dies, sells their home, or moves out, the loan immediately becomes due. One solution is to list your boarders on the loan paperwork; however, no one living with you under the age of 62 may be a borrower on the reverse mortgage. People of retirement age with health issues may obtain reverse mortgages as a way to raise cash for medical bills. However, they must be healthy enough to continue dwelling within the home. If an individual's health declines to the point where they must relocate to a treatment facility, the loan must be repaid in full, as the home no longer qualifies as the borrower's primary residence.
Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. For this reason, borrowers are required to certify in writing each year that they still live in the home they're borrowing against, in order to avoid foreclosure. These costs include lender fees, initial mortgage insurance costs, ongoing mortgage insurance premiums, and closing a.
Homeowners who suddenly vacate or sell the property have just six months to repay the loan. And while borrowers may pocket any sales proceeds above the balance owed on the loan, thousands of dollars in reverse mortgage costs will have already been paid out.
Reverse mortgage proceeds may not be enough to cover property taxes , homeowner insurance premiums, and home maintenance costs.
Failure to stay current in any of these areas may cause lenders to call the reverse mortgage due, potentially resulting in the loss of one's home.
Home equity conversion mortgages , the most common type of reverse mortgage, bring a number of fees and costs. Some fees are one-time, and some are ongoing costs. To start with, all borrowers taking out a HECM reverse mortgage loan must undergo counseling from a HUD-approved reverse mortgage counselor. More from Invest in You: Not a saver? Learn these skills and end your year with a nice stash Prices go up every year.
That doesn't mean you have to pay more If you need cash, try these less-obvious sources. Payments vary widely in different reverse mortgages, from a one-time payment, or by leaving funds in a line-of-credit that can grow over time if unused, or as monthly payments, or some combination of options. Most popular is the variable-rate home equity conversion mortgage, according to Wade Pfau, professor of retirement income at the American College, in Bryn Mawr, Pennsylvania.
Other arrangements are the proprietary reverse mortgage, a private loan backed by a company, and the single-purpose reverse mortgage offered by some state or local government agencies. When you're considering a reverse mortgage, ask yourself if the house will work for you the rest of your life, says Carolyn McClanahan, a physician and certified financial planner who is founder and director of financial planning at Life Planning Partners in Jacksonville, Florida.
Scout other possibilities, she advises, such as selling the house so you can use the money for a less-expensive property or to rent. And there's another potential reason we'll see more interest in reverse mortgages. Retirement communities and assisted living facilities have become more common in recent decades. However, in the age of Covid, Americans may decide that large groups of older people living together in one place might not be a good idea after all, McClanahan says.
This could mean that more people will try to age in place. Having more equity built up in the home than in savings is a common reason for turning to a reverse mortgage. In other words, some people are "home-rich and cash-poor," Pfau said. A good strategy could be taking some of the initial money and putting it into modifications to make the home adaptable for someone as they age.
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