Are Reverse Mortgages a Good Option When Rates Are Climbing

If you are 62 or older, a reverse mortgage can help you pay off your mortgage, pay for healthcare, and supplement your income. It helps you convert part of your home equity into cash without selling your home. 

Let’s discuss how a reverse mortgage loan works and whether a reverse mortgage is a good option when rates are climbing. 

How a Reverse Mortgage Works

A reverse mortgage helps you tap into your home's equity and converts it into an advance payment on your home equity. In a reverse mortgage, the lender pays you as the homeowner, and the money you receive is tax-free. 

In a reverse mortgage, you are not required to pay back the money if you continue living in the home. However, the loan has to be paid off if you permanently move out, sell the home, or die. 

The amount you can borrow (principal limit) is calculated using the reverse mortgage calculator, which gathers information about you, your property, your age, your non-borrowing spouse, the age of the youngest borrower, the current interest rate, the home’s value, and the Home Equity Conversion Mortgage (HECM) mortgage limit. Actually, the older you are, the more your property will be worth, and you will qualify for a lower interest rate.

But are reverse mortgages a good option when rates are climbing? When considering a reverse mortgage, it is best to take a loan when the mortgage interest rates are low, and your home value is high to get the advantage of reverse mortgages. 

When reverse mortgage interest increases by one percent, the amount you qualify to receive will go down, so if you were to receive $200,000, you would end up qualifying for a lesser amount, like $175,000.

3 Types of Reverse Mortgages

There are three types of reverse mortgages: 

  • Single-purpose reverse mortgages 
  • Proprietary reverse mortgages 
  • Home Equity Conversion Mortgages (HECMs)

Single-Purpose Reverse Mortgages

These mortgages are the least expensive and are available from government agencies and non-profit organizations. Just as the name suggests, the loan is limited to the single purpose outlined by the lender, such as home improvement, repairs, or paying property taxes. It is the lowest-cost option among reverse mortgages; those with a low or moderate income can qualify for these loans.

Proprietary Reverse Mortgages

Proprietary reverse mortgages are private loans with more flexibility than single-purpose loans. If your home has a higher value, you can use your home to secure a bigger loan advance.

Home Equity Conversion Mortgages (HECMs)

HECMs, also known as federally-insured reverse mortgages, are backed by the Federal Housing Administration. It is more expensive than traditional home loans since you have to pay an insurance premium to fund FHA reserves. 

These reserves come in handy when you are unable to repay your loan. HECMs are the most common reverse mortgage since they are not limiting. However, it may not be the best if you plan to stay in your home for a short time due to a higher upfront cost or if you fail to repay the loan.

Reverse Mortgage Guide

Should you take a reverse mortgage? A reverse mortgage is useful when your home’s value is increasing considerably. You should ensure that you will stay in your house for a long time to make the upfront costs you incur worth it. Have sufficient cash flow to stay current on your property taxes and insurance maintenance. 

Just as you would need a mortgage calculator to know how much you need to pay each month and for how long, a reverse mortgage calculator will help you know how much you can get and the different payment options, e.g., monthly disbursement, line of credit (LOC), or lump sum. 

Reverse Mortgage Pros and Cons

Here are some advantages and disadvantages worth considering:

Pros

Secures Your Retirement

Reverse mortgages are a perfect choice for retirees with limited financial capabilities but who have built value in their homes. They can simply convert their home’s equity into cash without having to move out of their home to cover any expenses.

The Money You Receive Is Tax-Free

The money you receive from a reverse mortgage is tax-free, so you won’t have to worry about the IRS, and neither will it affect your social security or medical payments.

You Don’t Have to Sell Your Home

A reverse mortgage allows you to keep your home and still get money using your home, so you do not have to worry about downsizing.

Helps You Pay Off Your Existing Home Loan

If you have an existing loan, a reverse mortgage will help you pay the loan while freeing your money to cater to other expenses.

Offers Protection

If your home value becomes lesser than the total amount owed due to a price fall, you won’t need to pay the amount owed. In case of death, non-borrowing spouses not listed on the mortgage can continue staying in the house.

Cons

Loan Balance Increases 

Unlike traditional mortgages, where the loan balance decreases each month, reverse mortgages increase. If not careful, the debt may exceed the home value, and those who will inherit the house will inherit a huge debt that may prove to be an uphill task to pay off.

You Could Lose Your Home

If you become delinquent on your reverse mortgage loan or spend most of the time outside the property, you may default on your loan and lose your home to foreclosure. 

You Have to Pay Fees

An upfront premium (usually 2% of your home's value) is associated with reverse mortgages. Roll these charges into your loan balance to work around this, even though this will mean receiving less money. 

Conclusion

Taking a reverse mortgage is a faster way of getting a loan. But before taking the loan, ensure you plan to live in the property for a long time, ensure you will stay current on property taxes and insurance, and that your home will increase in value. 

MortgageWorks offers financing for new home purchases, refinance, home equity, investment property, construction, and a wide variety of loan program options to fit your every need.



Servicing the state of California and the entire Coachella Valley, including Palm Springs, Cathedral City, Rancho Mirage, Indian Wells, Palm Desert, Desert Hot Springs, La Quinta, Indio and Coachella. Call Art today @ (760) 883-5700


* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.