With healthcare costs steadily climbing and pensions shrinking, it’s not surprising that many seniors consider a reverse mortgage as a potentially painless way to cover expenses by tapping into their home equity. The retired congressman endorsing them in the TV ads sure makes the case seem open-and-shut: “There’s got to be a catch, right?” he asks the camera. “Well, there isn’t.”
And yet, so many seniors misunderstand basic features of the reverse mortgage product, including that it’s a loan that actually has to be paid back. So what are the facts, exactly, about reverse mortgages? And are they an appropriate option for all senior homeowners? Simply put, a reverse mortgage is a loan available to homeowners 62 and over that allows them to convert a percentage of their home equity into cash, paid from the lender to the borrower (hence the term “reverse”). The money cashed out is usually tax-free, and the loan typically does not come due until the last surviving borrower has left the property. The amount available for borrowing depends on several factors including the applicant’s age; their financial ability to pay property taxes and homeowner’s insurance; the type of reverse mortgage selected; the home’s appraised value; the amount owed on the home, and current interest rates. Generally speaking, the older you are and the less you owe on your home, the larger the loan you’ll qualify for.
There are three types of reverse mortgages (click each link for details): the single-purpose reverse mortgage, the least-expensive option with the most restrictions; the proprietary reverse mortgage, which is a private loan potentially larger and more costly, and a federally-insured reverse mortgage, or home equity conversion mortgage (HECM). This last option is backed by the US Department of Housing and Urban Development (HUD) and can be used for any purpose.
If you or a relative are considering a reverse mortgage, keep in mind the following:
- 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 remember it pays to 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 over time: 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 (mostly HECMs), they tend to require a lump-sum payout at closing, and often limit the loan amount available to borrow.
- You’re still responsible for homeowner expenses: Because you retain the title to your home, you’re still 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 on application may require what’s known as a “set-aside” amount to pay these costs, which reduces your payout.
- Your survivors will be impacted: Remember the simple fact that 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 be able to stay in the home after you go, but will not receive payments, and will be responsible for 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 home and pay off the loan, they would not have to pay more than its appraised value.
The decision to apply for a reverse mortgage has many ramifications, and should involve careful research and consideration. Here are some excellent resources to help you or your family members sort things out:
The US Dept of Housing and Urban Development (HUD) or call 1-800-225-5342
The Consumer Financial Protection Bureau or call 1-855-411-2372
The AARP Foundation’s Reverse Mortgage Education Project or call 1-800-209-8085