Sandy Lucchesi's Blog
If you’re retired, own your own home and have trouble making ends meet, a reverse mortgage may seem like the answer to prayers. You get to stay in your house and you’ll have some extra cash to see you through. Before you run to the nearest lender, however, consider the downside as well as upside to these instruments.
What is a reverse mortgage?
A financial institution lends you money, either a lump sum, a stream of payments or a line of credit, against the equity in your home. Unlike most loans, however, you’re not required to pay it back on a regular basis. You can let the loan ride until you die, move or sell the home, at which your home is sold and the proceeds pay off the loan.
While there are several flavors of reverse mortgage, most are insured by the Federal Housing Administration (FHA) under a program called the Home Equity Conversion Mortgage (HECM).
Am I eligible for a reverse mortgage?
Everyone on the title must be 62 or older. The home must be your primary residence, and your equity needs to be at least around 50 percent. Also, you have to attend consumer counseling before signing up.
What are the pros of a reverse mortgage?
You stay in your home. You keep the title until you sell, move or die.
There are no required monthly payments. Any previous home loans are paid before you receive your proceeds.
If you choose to make payments, there’s no prepayment penalty.
The money you receive is not taxable, nor does it affect your Social Security or Medicare eligibility.
The loan is non-recourse. Regardless of your loan balance, you'll never have to pay back more than the house is worth.
What are the cons of a reverse mortgage?
Unless you make payments, the loan amount will continue to increase. It’s unlikely you’ll pass the home on to your heirs.
You must continue to pay taxes, insurance and necessary maintenance and repairs. Failure to do so can lead to foreclosure.
There are upfront and ongoing mortgage insurance premiums as well as a loan origination fee. These (and interest rates) trend higher than for other mortgage loans.
Your favorite bank may not offer reverse mortgages. Most issuers are small banks, credit unions and online lenders. Some lenders have made misleading claims that understate the risk.
If you go into a nursing home you will have to sell the home and pay off the loan.
While Social Security and Medicare are not an issue, reverse mortgage income can affect your eligibility for Medicaid and Supplemental Security Income.
Should I apply for a reverse mortgage?
If you plan to stay in your home well into retirement and are having trouble with ongoing expenses, it may be right for you. However, if you aren’t cautious about what you’re getting into, or if you’ll have trouble paying taxes, insurance and upkeep even with the extra money, it isn’t a wise choice.
212 Lumber St, Hopkinton, MA 01748
Should you cosign on a mortgage loan to help someone else buy a house?
Hopeful home buyers who lack the necessary credit history, W-2 income or overall income versus their debt can face problems getting a mortgage lender to approve a loan. Borrowers with a 43% or higher debt-to-income ratio may learn their income doesn't suffice. Yet if a cosigner steps up, promising to pay the mortgage if needed, the loan might be approved.
If you are the one who steps in, it's highly likely that your name will actually be on the title. Most lenders want it that way, so the asset can be pledged as collateral by both of you.
Are You Prepared to Do More Than Simply Cosign the Loan? Should You?
So, if the mortgage company asks you to serve as a co-borrower, not just a cosigner, understand the lender's expectations. Does the lender expect you to become a co-owner? If so, your name will appear, along with the primary borrower's, on the deed — even if you never set foot in the house and don't expect to pay anything.
If the person you are helping ever gets in a bind and can't make a mortgage payment, you'll be second in line to pay. And your credit report will be dented if you don't.
Were you a mere cosigner, you'd be asked to pay the debt but never have a claim to the value of the home. In other words, mere cosigners get liability for the debt — without the asset.
What Does a Good Outcome Look Like?
Of course, you want the person you're helping to enjoy living in the home, to pay the monthly mortgage and, ultimately, to apply for a new loan that refinances the debt and turns the primary borrower into the sole borrower and the sole owner.
Even if you are 100% sure all will go as planned, it's a good idea to have a lawyer draw up a binding agreement that memorializes the primary borrower's intent to let you off the title, deed, mortgage and homeowner's insurance policy by a date certain after closing on the home. It will keep the primary borrower focused on making regular mortgage payments and developing strong credit, anticipating the refinancing application process.
When the primary buyer successfully refinances the home mortgage, it will be time for you to take your name off the title. You can sign a quitclaim deed to release yourself from ownership.
Then you can congratulate yourself for enabling someone to buy a home. And congratulate the new homeowner for keeping both of your credit ratings as strong as your relationship.
9 Canterbury Ln, Hopkinton, MA 01748