Reverse mortgages are often touted by traditional lending institutions as a way for older homeowners to access their home’s equity without making loan payments. But the fact remains that a reverse mortgage is still a type of loan, and as with all loan types, there are downsides. Here we cover everything you should know about reverse mortgages and provide some insights into alternatives that may work better for you.
What is a Reverse Mortgage?
Contrary to how the name sounds, a reverse mortgage is still a type of loan, despite the fact that there are no monthly loan payments. They are generally geared toward older demographics, targeting seniors aged 62 and up that have built equity in their home. Essentially, the homeowner borrows against the value of their home and receives money in the form of either a lump sum, monthly payments, or a new line of credit.
Now, you may be thinking, “free money? No way, what’s the catch?” Well, the catch is that the entirety of the loan balance is due after the borrower dies, changes their permanent residence, or moves out of the home that they borrowed against.
This may sound as if the homeowner is throwing their family under the bus, since an entire loan balance must be paid after death. But federal regulations require lenders to structure the loan in such a way that the borrower’s estate is not responsible for repaying the loan if the balance exceeds the property’s value. This can happen in certain particular situations: for instance, if the homeowner’s property value plummets or if the borrower lives for a very long time.
How Reverse Mortgages Work
So, let’s say you walk into your local lending institution and ask them about getting a reverse mortgage. Here are some of the main talking points that they will hit:
- You need an abundance of equity in your home. A reverse mortgage is essentially a way for you to cash in on your property value if you need the money. Oftentimes, reverse mortgages are ideal for seniors whose net worth are largely tied to their home value.
- Instead of you paying the bank on a monthly basis, they pay you on a monthly basis (or in a lump sum or via a new line of credit).
- Your home is the collateral. When you pass away or move, the lender will sell the property, which is then used to pay off the balance of the loan. This can be good or bad, depending on a variety of factors. For instance, if your family wants to keep the home after you pass, they will be responsible for paying off the mortgage’s balance first.
- You don’t pay anything up front, including interest, and you keep the title of the home.
- Reverse mortgages are not taxable.
The Downsides of Reverse Mortgages
Like anything in life, there are two sides to the coin. Below are some of the main concerns surrounding them, so be mindful of these when considering if one is right for you.
- Taking out a reverse mortgage means spending most, if not all, of the home equity that you’ve built up over the years. When the mortgage balance is due, your home will be used to pay off interest and loan fees.
- You will be unable to pass your home on to your heirs. Oftentimes, people invest in property so they can ensure a stable living situation for their children. But if you take out a reverse mortgage on the home, your children will be on the hook for paying off the loan balance first, if they do decide to keep the home.
- If you live with family members or roommates, they will need to move out of the home after you pass away, since the home is essentially owned by the lender once you are gone.
- If you opt for opening a new line of credit instead of lump sum or monthly lifetime payments and then exhaust that credit line, you’ll be in big trouble. In some cases, reverse mortgage recipients do not ensure lifetime payments, meaning they outlive the mortgage proceeds and are left with no other income.
- Be wary of sales pitches. The reverse mortgage industry is fraught with scam artists. From the Federal Trade Commission’s website, “some sellers may try to sell you things like home improvement services – but then suggest a reverse mortgage as an easy way to pay for them. . .Some reverse mortgage sales people might suggest ways to invest the money from your reverse mortgage – even pressuring you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage.” DO NOT sign ANYTHING before consulting with an independent, federally-approved housing counselor or somebody else that you trust. If something smells fishy, don’t risk it. Walk away.
- Reverse mortgages aren’t the only way to tap into your home’s equity. SKYDAN Equity Partners, for example, offers a comprehensive home sale/leaseback program that allows you to stay in your home, has no monthly payments, and doesn’t carry the same stringent requirements (credit check, background check, employment status, etc.) that traditional lenders have.
SKYDAN Equity Partners’ Home Sale/Leaseback Program
SKYDAN Equity Partners’ home buyback program is designed to help struggling homeowners get out of financial binds. Our unique program allows you to sell your home and stay in it, letting you reap the benefits of a cash injection to pay off bills without having to be tossed to the curb or losing your beloved community. Our program does not come with the same risks that accompany traditional lending avenues such as reverse mortgages, HELOCs, or home equity loans.
Here’s how it works:
We buy your home for a fair price and in return give you a large sum of cash, with which you pay off existing debts (property taxes, credit card debt, medical bills, etc.). You then lease the home back from us for up to 24 months with deferred rent payments. This means that while you’re leasing your home back from us, there are no monthly payments, no interest paid, and no added debt.
At the end of the 24-month period, you have two options:
Purchase the home back (original price + deferred rent)
Sell the property, keeping all additional equity
We don’t care about your credit score, employment history or debt-to-income ratio. We are here to help you break the cycle of debt, not add to it as traditional home loans do. The only thing you need in order to qualify for our program is to have enough equity in your home. If you need to tap into your home’s equity to help pay for life expenses and are wary about reverse mortgages, give us a call today for a consultation.