If you’ve ever spent any time watching mid-day talk shows, news, or game shows, you’ve likely seen commercials with handsome actors touting reverse mortgages to seniors. With the rising costs of living and healthcare, coupled with longer life expectancies, it’s not surprising that many seniors consider a reverse mortgage to cover expenses by tapping into their home equity. Yet, many seniors misunderstand basic features of reverse mortgages, also known as a Home Equity Conversion Mortgage (HCEM), including that it’s a loan that must be paid back.
A reverse mortgage is a loan available to homeowners 62 and older that allows them to convert a percentage of their home equity into cash, paid from the lender to the borrower. The money cashed out is usually tax-free. Unlike a traditional home equity loan, the money does not have to be repaid until the last surviving borrower has left the property or you fail to meet the terms of the mortgage. The amount available for borrowing depends on several factors, including the applicant’s age, financial standing, homeowner’s insurances, the type of reverse mortgage selected, the home’s appraisal, and the amount owed on the house. Generally, the older you are, and the less you owe on the home, the larger the loan.
If you or a loved one are considering a reverse mortgage, keep the following in mind:
Be Aware of Fees and Hidden Costs
Reverse mortgage lenders can charge origination fees and other closing costs, service fees over the life of the loan, and even mortgage insurance premiums. Factor those into consideration and shop around as rates can vary.
Your Loan Balance Increases Over Time
As you collect funds, interest is added to the amount you owe, meaning your outstanding balance grows over the life of the loan.
Loan Interest Rates May Change
Most reverse mortgages offer variable rates that fluctuate with the market, so there’s always a risk that your outstanding balance will climb. While some do feature fixed rates, they tend to require a lump-sum payout at closing and often limit the loan amount available to borrow.
You’re Responsible for Homeowner Expenses
With a reverse mortgage, you retain the title to your home and are required to pay property taxes, utilities, insurance, fuel, and maintenance costs. Failure to pay these may result in your loan being recalled. The financial assessment performed by the lender may require a “set-aside” amount to pay these costs, which reduces your payout.
Your Survivors Will be Impacted
Any reverse mortgage payments you receive while in your home must be paid back out of your home’s equity when you move or pass away, thereby lowering the financial benefit to your heirs. Also, a surviving spouse not named on the loan may stay in the home but will not receive payments and will be responsible for the upkeep, taxes, and insurance. Most reverse mortgages do have a non-recourse clause that stipulates you cannot owe more than the market value of your home when it is sold. So, if your heirs wanted to keep the house and pay off the loan, they would not have to pay more than its appraised value.
You Must Receive Counseling
If you’re considering a reverse mortgage, federal law requires that you receive counseling by a HUD-approved counseling agency. A certified counselor can explain all the facets of the loan, help you understand the features of the different types of reverse mortgages, and evaluate whether a reverse mortgage will benefit you long-term. We suggest meeting with your counselor before talking to a lender.
Applying for a reverse mortgage should involve careful research and consideration. These are excellent resources to help decide if a reverse mortgage is right for you: the US Dept of Housing and Urban Development (HUD), the Consumer Financial Protection Bureau, and the AARP Foundation’s Reverse Mortgage Education Project.