Is a Reverse Mortgage a Viable Option For Me?
Wouldn’t it be nice to grab some quick cash from the equity in your home once you get into your later years? You might have some medical expenses coming up or you might even have a nice vacation that you have been planning for years.
I’ve always said that if it is too good to be true then chances are it is.
We want to talk about the risk involved in pulling out a reverse mortgage on your home:
Moving out of the property
Whether you are the one getting the reverse mortgage or the child assisting the parent getting the mortgage, there are some details to consider before you do so. Most loans require you to fully occupy the property while the debt is still outstanding. This means that if you or your parent must be put into a nursing home or an assisted living facility at any time, the debt is still outstanding, and must be paid in full. This can pose a big problem because as we all know assisted living facilities or nursing homes are not cheap. Even if a child or non-borrowing member is still living in the home at the time it still must be paid.
When obtaining a reverse mortgage there are several requirements that the lender must do to maintain good standing. You must pay property taxes on time without penalty, carry home owner’s insurance, and keep the property in good condition or the lender has the right to foreclose immediately. This too can be a big problem because in our later years real estate can become much harder to take care of.
Once the elder passes away, the loan now becomes due and must be paid in full. This means that all principal, interest and fees must be taken care of before ownership or possession can be obtained. If this can’t be achieved at this time, the lender then has the right to foreclose and liquidate the property. If you have any inheritance from the estate as an heir you can kiss a big chuck of it goodbye.
Loan to value on borrowing
Let’s be real, banks are in the business to make money. Therefore, they are not going to get themselves into a position of lending more money than they must on a reverse mortgage. Based on HUD and FHA guidelines, a maximum of 66% of a home’s value can be obtained when getting a reverse mortgage. This means if you don’t have the ability to pay it back later you’re are giving the bank 34% of your equity immediately! When you are basing the borrowed amount on these restraints it might make you reconsider this option completely. We all know the cost of assisted living or a nursing home and 66% of your equity will only cover a fraction of these cost. So, think wisely!
Although we agreed that a reverse mortgage is an option when you need to cash out on your equity, we feel it should be done on a last resort basis. We feel there are much smarter ways of addressing large financial burdens that may not have such a harmful conclusion like a reverse mortgage.