Can You Run Out of Money with a Reverse Mortgage?
Following the aftermath of the Great Recession in 2008, reverse mortgage programs got a bad rap. There were horror stories about American seniors losing their homes because they’d taken out reverse mortgages. A prevailing myth was that a reverse mortgage holder’s home could be foreclosed upon if all of the equity had been used up.
In fact, there are only a few circumstances that would set the foreclosure wheels in motion when it comes to a reverse mortgage:
- If the borrower fails to pay his or her property taxes, which is required by cities and counties.
- If the borrower fails to pay their homeowner’s insurance premiums, which protects the integrity of the asset.
- If the borrower allows their home to fall into severe disrepair.
Before HUD made changes to their non-borrower spouse policy, the main exception to this scenario was when both spouses were not on the mortgage. Before, a non-borrowing spouse that survived his or her borrowing spouse faced the risk of losing the home to foreclosure because the loan would be called due and the surviving spouse would be unable to pay the balance. Now, non-borrowing spouses have certain protections against facing foreclosure or eviction. Still, when a couple chooses to take advantage of a reverse mortgage program, it may be an important consideration to have both people on the mortgage.
Reverse Mortgage Protections
Another point worth considering is that reverse mortgages have prevented many seniors from going into foreclosure. They also make it possible for many older Americans to stay in their homes for years or even decades beyond what they thought they would previously be able to afford. That is the beauty of the reverse mortgage set-up! Homeowners who opt for this type of mortgage can stay there in their homes as long as they live, or until they are ready to transition to an assisted living facility. Even more appealing is the fact that they can remain in their home without having the looming responsibility of making mortgage payments.
Since HECMs are backed by HUD and the FHA, safeguards for both lenders and borrowers are in place. Senior borrowers are protected regardless of the amount of home equity, or lack thereof, that they have. The only requirements that they must honor are the same ones that they have likely been following since they took out their very first home loan. As long as they reside on the property, they are protected against foreclosure as long as the home is their primary residence, they maintain it, and pay all of the appropriate taxes, insurance and fees such as HOA dues.
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Payment Options for the Borrower
As for the question of having enough money to live on, that could depend on which payout method the borrowers opt for. Of the three choices — lump sum, monthly payments or lines of credit — the monthly payment option is likely the safest if you are concerned about running out of funds. Should the value of the home increase dramatically, the payment amount does not change. Even if the monthly payment amount results in a loan balance that surpasses the home’s value, the borrower/homeowner will not responsible for repaying the excess.
Another option could be a line of credit reverse mortgage payment. With this payout type, a borrower can choose to make withdrawals on an as-needed basis. Many seniors are quite disciplined with their finances and use reverse mortgage lines of credit as they would a credit card.
Those who choose to take the payout as one lump sum will want to be extremely mindful of how and when they use it. Please keep in mind that everyone handles his or her finances differently and managing money is definitely a learned skill. If there is every any doubt, a meeting with a financial planner is an excellent way to device a financial strategy.