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A reverse mortgage is an increasingly popular financial tool for seniors that utilizes the equity in a homeowner’s home to provide them with an income in retirement. This article will examine reverse mortgages in Texas, how they work, and who can utilize them. If you have questions regarding the use of a reverse mortgage in Austin, Pflugerville, or Round Rock, contact the real estate attorneys at the office of Sheehan Law, PLLC for a consultation.
Reverse Mortgage Basics
A reverse mortgage allows a homeowner to borrow against the equity in their home. Essentially, a reverse mortgage allows a homeowner to “cash out” equity in their home. Borrowers typically have three options regarding receiving reverse mortgage payments:
- A single lump sum payment.
- Monthly payments for as long as the borrower lives in the home, or for a set period.
- A line of credit.
The type of payment and terms will depend on the creditor. Generally, the money can be used for anything: medical bills, food, leisure activities, etc. Reverse mortgages do not require any monthly payments or any form of repayment during the lifetime of the borrower, except in certain circumstances.
Reverse mortgages cannot be utilized by everyone. Only those who meet certain requirements may take out a reverse mortgage. First, the homeowner must be over the age of 62. The homeowner must own their home outright, or have a low balance on their mortgage in certain cases. Also, the home must be free of other encumbrances and liens. (One exception to this rule is in the case where the reverse mortgage is to be used to pay off the existing mortgage on the home.) Finally, the homeowner must actually live in the home that is being borrowed against. Other property, such as commercial real estate or a vacation home that is not the primary residence of the borrower, may not be used.
Repayment of Reverse Mortgages
Unlike most loans, reverse mortgages do not require monthly payments. In fact, reverse mortgages do not require repayment until one of the following conditions has occurred:
- All borrowers have died.
- The property is sold or transferred.
- No borrower lives in the property for a period longer than 12 months.
- The borrower fails to maintain, pay taxes on, or insure the home.
Like most loans, a reverse mortgage loan will accrue interest. The rate and type (fixed vs. adjustable) will depend on the lender.
Effects of a Reverse Mortgage on Title and Heirs
A reverse mortgage has no effect on title, so the borrower retains full title to the home. However, a reverse mortgage will have an effect on what happens to the home when payment becomes due. What effect this has depends on why the reverse mortgage enters repayment.
If the borrower sells the home, they must pay the lender for the amount borrowed plus interest and fees from the proceeds of the sale. If the home is not sold at a price covering the outstanding loan amount, the borrower must still cover the remaining amount through other means. Also note:
- If the borrower permanently moves from the home, but does not sell it, they must repay the outstanding loan amount. The lender may foreclose upon the home and sell it to cover the outstanding amount if the borrower moves out but cannot pay, just like a mortgage.
- If the borrower dies and wishes to leave the home to his/her heirs, the borrower’s estate or his heirs must repay the loan. If repayment is not possible, the lender may foreclose upon and sell the home.
It is important that a borrower, prior to taking out a reverse mortgage, considers what they hope to do with the home upon death. If they hope to leave the home to their heirs, they must ensure that their estate or their heirs are willing and able to repay the outstanding loan.
Who Should Take Out a Reverse Mortgage?
Reverse mortgages are not right for every senior, and there are important factors to consider prior to taking out a reverse mortgage. First, the fees associated with reverse mortgages tend to be high, especially in comparison to similar loans, such as home equity loans. Second, interest rates also tend to be comparatively higher than similar loans. Depending on the circumstances, it may be very difficult for a borrower to pass a home with a reverse mortgage on to his or her heirs. Finally, it is important to keep in mind that reverse mortgage loan repayments are triggered not only by death, but by moving from the home.
Because of these downsides, a reverse mortgage is not always the best option for someone who does not plan on remaining in the home. The high fees associated with originating the loan and the movement repayment trigger make it more suitable for borrowers who plan to remain in the home for the rest of their lives. It may also be appropriate for seniors who simply cannot make the monthly payments required by other types of loans, such as a home equity loan.
It is also important to consider timing. While a homeowner may take out a loan as soon as they are 62, it is generally well advised to wait as long as possible and preserve equity before taking out a reverse mortgage.
There are several alternatives for seniors in need of income in their retirement. Two examples include a home equity loan or simply selling their current home and downsizing. Both of these options may provide a cheaper means of acquiring cash in retirement, particularly for homeowners that do not plan on remaining in their current home.
Questions? Contact Sheehan Law, PLLC
If you have any questions about reverse mortgages in Texas or anything else regarding real estate law, please do not hesitate to contact us by phone at (512) 251-4553 for an initial consultation. Other contact information is listed in the upper right-hand area of this page, and a contact form is also available on our contact page.