If you’re feeling the economic pinch, you aren’t alone. It’s October 2022, and inflation on grocery prices reached a downright obnoxious 13.5% increase over the past year. Those on fixed incomes often scramble, borrowing money from friends and family and sometimes visiting food pantries.
However, there may be a way to lower your expenses and free up the equity in your home with a reverse mortgage. You may qualify if you have paid off a substantial portion of your original note. This avenue has many advantages – is it right for you? Here’s what you need to know about reverse mortgages.
Reverse mortgages are only available for homeowners over 62 years of age. They can put more money in your pocket by eliminating your monthly mortgage payment, although you’ll remain liable for property taxes and insurance. With this type of mortgage, the amount you owe on the property goes up, not down, over time. However, you continue living in the residence and retain ownership over it.
Confusion sets in because you “repay” this loan when you no longer live in the home. However, your children do not necessarily lose their inheritance, at least not all of it. The property sale proceeds repay the lender, but any remaining equity exceeding the amount due passes to your heirs.
Many houses retain some equity as values appreciate over time. Furthermore, they won’t be liable if your loan balance exceeds your home’s value – they aren’t responsible for the difference.
The real estate market shows signs of cooling and experts disagree on whether 2023 will cause a crash or properties will maintain much of their value. The peak time for maximizing your resale potential may have passed – for this cycle – or you could still take advantage of high prices and decide to sell. Will a reverse mortgage preclude you from this possible solution to your money woes?
Fortunately, you can still sell your home, but the process becomes more complicated if your home loses value. You’re in luck if you can sell for more than the amount owed.
However, listing your home when it has lost value requires working with your lender first to determine the appraised value and what the lender will accept. They’ll often settle for 95% of the appraised value, with your mortgage insurance picking up the rest of the tab. Please don’t think this process is easy or headache-free, but you can get through it.
One attractive feature of reverse mortgages is that you retain home ownership. You can continue to reside in it until the day you pass away and treat it like your property in every way, including making upgrades and improvements.
However, certain events can trigger maturity in a reverse mortgage that renders the entire amount due. These include the death of the owner, or sale or transfer of the title, but also encompass the below circumstances:
- The owner no longer resides in the home: You must be gone for at least 12 consecutive months.
- The home is no longer the principal residence: If you begin living elsewhere most of the time, perhaps to help adult children or enjoy a better climate, you could trigger a maturity event.
- You fall behind with taxes or insurance: Although you won’t have a monthly mortgage payment, you must pay the taxes and insurance. Failure to do so will trigger your lender to call your loan due.
- You fail to repair the home: You have to protect the value of the investment. While you’re free to make improvements, you can’t let the house fall into disrepair.
If one of the above circumstances triggers a maturity event, your lender will notify you. You will then have approximately six months to repay the full amount due, sell the home, or produce a deed in lieu of foreclosure, which grants your lender the right to sell the property.
Given the recent uptick in multigenerational living, you should consider the other tenants in the home before taking on a reverse mortgage. For example, it isn’t uncommon for older adults to have adult children move in with them to help them manage the activities of daily living while saving money to purchase a separate home.
For many, such an arrangement offers the most realistic chance at homeownership in today’s world of soaring rents capturing too much of the average take-home paycheck to permit saving for a down payment. The typical U.S. rent exceeded $2,000 a month for the first time in August.
However, problems could arise for multiple parties if you die or trigger a maturity event during the tenancy. Although your adult children could purchase the home, they will need a way to pay off the balance, which often means they’ll need to take out a mortgage.
If your heirs aren’t in the position to do so credit-wise, they could be left in the cold. Many reverse mortgage lenders rush the foreclosure process to protect themselves. Even if they can buy, they could pay tens of thousands more, thanks to today’s high interest rates.
You have other options, including allowing your children to cover your mortgage by paying your rent. You might also consider a seller carryback where you essentially act as a lender. You’ll still contend with high interest rates but you’ll have less confusion and fewer headaches about who owns the property if the inevitable occurs.
Reverse mortgages can keep more money in your pocket during your sunset years. You’ll liberate yourself from most people’s biggest monthly bill – your mortgage payment. However, these instruments aren’t without their pros and cons. Consider what you need to know about reverse mortgages before making your choice.
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