Risks of Taking Out a Reverse Mortgage Too Soon
For the right homeowner, a Reverse Mortgage can provide tremendous financial help, allow them to age-in-place, or even purchase a new home altogether. However, there are certain risks involved in getting a Reverse Mortgage. These risks can lead to financial woe and can shatter peace of mind if not taken into consideration beforehand. For this reason, we aim to provide the most thorough, accurate information on Reverse Mortgages, allowing our site’s visitors and our potential borrowers to make an educated decision.
One of the major risks involved with Reverse Mortgages is getting one too soon. You might be wondering, How is that possible? Don’t you have to be 62 or older to even qualify for a Reverse Mortgage? And isn’t there some kind of guarantee that the proceeds never run out? Well, yes and no.
To qualify for a Reverse Mortgage, a borrower must be at least 62 years old – that’s true. But how the borrower receives their Reverse Mortgage proceeds can vary and it actually is possible for the proceeds to run out.
There are three main ways a borrower can receive their Reverse Mortgage proceeds: Lump sum, monthly payments and line of credit.
The only option that offers a fixed interest rate for Reverse Mortgage proceeds is the lump sum. Borrowers who choose this option can avoid leaving a higher loan balance after they move or pass away; however, they run the risk of outliving their payments. For example, if you take out a Reverse Mortgage at age 62 – the earliest you can qualify – and you choose a lump sum, you would have to try to make that money last until you either pass away or you move into an assisted care facility or nursing home (at which point, the loan will need to be repaid). If you’re in you’re early sixties and still in fairly good health, this option may not be ideal.
If a borrower opts to receive their Reverse Mortgage proceeds in monthly payments, there are a few sub-options: Tenure and term.
With tenure, qualified borrowers continue to receive payments for as long as they live in the home and as long as they keep up with their property taxes and homeowners insurance.
With term, the Reverse Mortgage will be structured so that the borrower receives equal monthly payments with a predetermined stop date. This option typically carries a fixed interest rate, making it more affordable when it comes time to pay it off; however, it is possible for borrowers to outlive their proceeds.
Another option is the modified term. This allows the borrower to receive monthly payments for a predetermined period, with a line of credit available after that. This may be a better option for homeowners who are facing short-term or non-permanent financial need.
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Line of Credit
With this option, the borrower has access to all of their Reverse Mortgage proceeds but they can choose when and how much they use. Think of it kind of like having a credit card and your Reverse Mortgage proceeds are your credit limit. You only owe what you use. There are benefits to choosing a line of credit, like increased credit line growth over time, but, just like with a lump sum payment, borrowers must resist the temptation to spend too much too quickly on their line of credit, otherwise their proceeds could run out while they still need them.
Risks of Outliving Your Reverse Mortgage Proceeds
If you’re relying on the proceeds of the Reverse Mortgage to pay your bills and day-to-day living expenses, it could be devastating if those proceeds run out while you still need them. You may need to get another job or take out more loans just to get by. You could default on your property taxes and homeowners insurance (both of which you are still required to pay when you get a Reverse Mortgage), which could lead to the loan being called due. This could mean having to sell your home, or the lender foreclosing on the property.
No one wants to foreclose on a home, especially one belonging to a senior citizen. Because of this, lenders have gotten more cautious about giving out Reverse Mortgages. In the old days, borrowers could get a Reverse Mortgage without as much financial verification or even a credit check. This led to a lot of senior homeowners losing their homes and winding up in worse financial shape than when they started. This is a major reason why Reverse Mortgages got such a bad rap: careless lenders handed them out without verifying that the borrower had the financial means to support him or herself if the proceeds dry up.
Now, things are very different. Stricter lending regulations and increased education has helped bring Reverse Mortgages back into the spotlight as a legitimate, although potentially risky, way for senior homeowners to improve their financial situation. But like any type of loan, Reverse Mortgages are not ideal for every borrower. If you’re considering a Reverse Mortgage, please browse through our Learning Center to research the benefits and risks associated with this unique home financing option.