Most of us have seen the ads on television about reverse mortgages. They suggest that they may be a good idea for senior homeowners, freeing up money to enable them to enjoy their later years without financial worries. Just what are reverse mortgages and whom can they benefit?
The Federal Trade Commission defines a reverse mortgage as, “a product available to individuals 62 years of age or older that allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills.”
A reverse mortgage is like a traditional loan in that you borrow against the equity in your home and receive monies from your lender. The difference between the two is that, while you retain the title to your home and are allowed to remain living there, a reverse mortgage must be repaid when the last surviving borrower dies, sells the home, or no longer lives in the home. A reverse mortgage usually will not affect your Social Security or Medicare benefits and the advances you receive are not taxable.
While you do receive money from a reverse mortgage, the debt grows as interest accrues on the amount of the outstanding balance, quickly and significantly eating away at the equity you have in your home. In order to retain ownership of the home, the loan must usually be repaid in full, even if the balance is greater than the value of the home at that time.
Three types of reverse mortgages are available:
- Single-purpose reverse mortgages are offered by some state and local government agencies and nonprofit organizations. These loans must be used for only one purpose, which is specified by the lender. They’re the least expensive type of reverse mortgages and homeowners with low to moderate income can qualify.
- Federally-insured reverse mortgages are known as Home Equity Conversion Mortgages (HECMs) and are backed by the U.S. Department of Housing and Urban Development (HUD). While more expensive than traditional home loans, HECMs are widely available, have no income requirements and can be used for any purpose. In general, these loans provide the borrower the highest advance at the lowest cost.
- Proprietary reverse mortgages are private loans that are backed by the companies that develop them. These are also more expensive than traditional home loans and some also require meeting with a counselor.
How much money can you borrow from a reverse mortgage?
The amount you can borrow depends on such factors as:
- your age
- type of mortgage
- appraised value of your home
- current interest rates
- amount of equity in your home
How can you receive payments?
There are four payment options:
- Term - fixed monthly cash advances for a specified time
- Tenure - fixed monthly cash advances for as long as you live in your home
- Line of credit - draw against the loan proceeds
- Combination - monthly payments and line of credit
Reverse mortgages are independent loans, arranged only through one of the three ways mentioned above. Don’t fall for unscrupulous salespeople who try one of these schemes:
- wrapping the cost of home repairs into a payment package which includes a reverse mortgage (and its related fees) to pay for them
- requiring you to buy other financial products (like long term care insurance)
Before committing to a reverse mortgage, thoroughly research the topic, compare lenders and explore other financing options. So long as it’s understood that there will be less home equity to leave to your heirs, a reverse mortgage can be a legitimate option for a financially easier retirement.
Is a reverse mortgage right for someone you know?