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Reverse Mortgage: Is it really worth it?

A reverse mortgage is a way to get an income to supplement your retirement income by taking advantage of your home. It can be very useful, but it also has its risks.

There are many ways to take advantage of a home to have a better retirement and also to complement the public pension. The most common is to plan for retirement and save through products such as pension plans or investment funds, for example.

For those who have already reached or are about to reach retirement age, there is an additional alternative that focuses on your home: the reverse mortgage.

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What is a reverse mortgage?

In short, it is money that the bank will give you for your home during your lifetime while you can continue to use it. When you die and depending on the mode, your lady can choose between returning the money to the bank and get the house back or collect the rest of the loan (if anything). We will address this issue in more detail later on.


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Requirements for applying for a reverse mortgage


Who can apply for a reverse mortgage? This product is limited to people over 65 years of age, although it is also available to people who are severely or heavily dependent. From then on, each entity can restrict this home loan to people over 70 years of age or the age they deem appropriate.

Obviously, it is also necessary to have a property, if possible, free of charges -that is why the cancellation of the previous mortgage is so important. If you have not finished paying the mortgage, the reverse mortgage loan would be extended to cover it. In other words, if there are 50,000 dollars left to pay on the mortgage, these 50,000 dollars would be added to the valuation of the house as part of the reverse mortgage loan.

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Ideally, the house should be the habitual residence, since in this case there will be no Documented Legal Acts Tax to pay when the loan is constituted. However, a second home would be just as valid.

In this sense, most banks will look for high value homes, which will allow them to get more out of the loan and protect themselves better.


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Can I apply for a reverse mortgage on a home with a mortgage?


Is it possible to take out a reverse mortgage on a home that is already mortgaged? The answer is no with a "but". The bank will require you to repay the loan first, but in most cases they will advance you the money to do so. 

If the bank gives you a reverse mortgage, it is because it is interested in you and it will continue to be interested in you even if you receive less money as rent and something else as an advance to pay the mortgage that is still outstanding. 


What income can you get with a reverse mortgage?


The amount of the loan will be linked to the value of the home and the way you want to be paid. In the case of cashing it all at once, the amount will be the appraisal that the bank makes of the house. However, it is normal to use the reverse mortgage to obtain a monthly, quarterly or half-yearly income.

In this case the rent will depend on the value of the house on the one hand and the age of the contracting party on the other. To help you understand this, if you take out a reverse mortgage at the age of 75, you will be able to charge more each month than if you take out a reverse mortgage at the age of 65. The reason is that there are 10 years less rent to be collected on the value of the house.

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Is the money from the reverse mortgage running out?


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There are several types of reverse mortgages. With the most basic one, the loan will give you what the house is worth. Once it is finished, the money to be received is also finished. In other words, you will receive for the reverse mortgage what you are given for the house during the time that the money lasts depending on what you want to receive each month. As an example, a house valued at 100,000 dollars will give you 10,000 dollars per year for 10 years.

As this amount is not always enough, the bank has a solution. Most banks allow you to take out deferred annuity insurance. With this insurance, if the person or persons who sign it survive the calculated age for the operation (if the mortgage money runs out), they will continue to receive their monthly income. However, these insurances are usually expensive and many entities will try to collect them in a single payment at the beginning of the mortgage signature.

This one-time payment for reverse mortgage income insurance involves advancing all the insurance money in a single payment instead of paying it monthly.

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Are taxes paid on the reverse mortgage?


The money received through this route has tax advantages. These amounts are not subject to income tax because they are provisions of a credit and not income for the purpose of filing the income tax return.

In other words, you will not have to pay taxes on the reverse mortgage. 

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It's different when you receive the income insurance money, because that capital does pay taxes. This would happen when the money from the home runs out because the older person has exceeded the life expectancy the bank was working with. In this case, and provided that the reverse mortgage contract so epstiples, an insurance of deferred life annuities will be activated for which you will have to pay in the income tax return. The amount to be paid will be only 1.44% of the amount received thanks to the tax advantages it offers. 


How the money is returned from the reverse mortgage?


The retired person who signs the reverse mortgage does not have to pay back any money. Unlike a normal loan where the amount to be repaid is reduced, with the reverse mortgage this amount only goes up. Those who pay in the end will be the heirs, although they won't really have to loosen their pockets if they don't want to.

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When the owner dies, the heirs can choose between returning the money to the bank to keep the house, sell the house and pay the debt and even take out a new mortgage to gradually pay the debt generated. The majority of entities will give them one year to face the debt, that habitually will be very inferior to the value of the house. So much so that it is normal that only 50% of the value of the mortgaged property is consumed in the market.

And could the rest of the loan be collected and the bank keep the house? This solution can be proposed to the bank, but no entity will accept it. The bank usually has little interest in keeping the house. What's more, if it does so, you should be wary because then its market value would be much higher than the rest of the loan.


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Can a reverse mortgage be paid off early?


Yes, all reverse mortgages must be able to be paid off early at any time. In fact, most institutions do not usually charge additional mortgage fees.

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The money to be paid back will be the one that the bank has lent us plus the expenses of the constitution of the mortgage and, of course, the interests.


Do you change the owner's house with a reverse hipoteca?


The mortgaged property does not change its ownership at any time. In other words, the house will remain the property of the person who signs the loan, who will also be able to continue living in it.

Like any mortgage, this is only a loan in which the house acts as a guarantee. You are still the owner.


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Can I rent my home with a reverse mortgage?


As the house is still owned by the senior, you can do whatever you want with it, even sell it, as long as you cancel the reverse mortgage you signed. 


What are the costs of a reverse mortgage?


To take out a reverse mortgage loan to complete your retirement, you will have to pay the AJD, unless it is your primary residence. To these costs are added those of the notary's office and the registry, as well as those of opening and constituting the loan. The normal way is that the bank advances these expenses on account of the loan.

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What will have to be paid at the time is the cost of appraisal of the property, which can amount to more than 400 dollars in the best of cases.

To these it is necessary to add the own ones of the interests that the bank will charge, that will be bigger the more time the mortgage lasts.


What does the bank charge for a reverse mortgage?


The bank is one of the parties interested in signing this type of loan. The financial entity charges an interest rate for the money it lends to the person who signs the reverse mortgage. This interest rate will be reflected at the end of the loan, when the time comes to recover the home, that is, to cancel the loan.

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When the reverse mortgage loan is cancelled, the entity will make the accounts. To the money that has received the major person will add the initial expenses and the generated interests. That will be the amount borrowed and that will have to be returned to keep the house. 

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Advantages of a reverse mortgage


The main advantage of a reverse mortgage loan is that it allows you to monetize an asset, the house, without having to sell or rent it. If you know that you will not have enough money with the public pension, this product will allow you to obtain additional income without giving up your home or having to pay rent.

In addition, it allows the heirs to recover the house if they wish or, failing that, to collect the money remaining from the loan. 


What are the risks of a reverse mortgage?

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The main risk of the reverse mortgage is in the contracting of the derived life annuity insurance. If it is paid as a single premium, it will cause the final price to go up a lot. As an example: for a loan of 664,526 dollars taken out in 2013 by a person aged 85 and which would be activated when he or she reached 93, the single premium would be 211,000 dollars.

The other big disadvantage of the reverse mortgage is that the income to be received is not updated, so the capital will lose value due to the effect of inflation. In addition, it could be the case that, when the time comes, the house is worth less than the loan. This burden would be assumed by the heirs - here you can see what the process of inheritance looks like.

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