You may have seen ads on tv where some former tv star is selling reverse mortgages as an easy way for seniors to get extra cash by using the equity in their home. Before you grab your phone and call the number on the screen, you should know what you are getting yourself into, whether it is a good idea for you and if someone is trying to scam you.
The Seniors Center has created this guide to help retired people make their best decisions about reverse mortgages. Make sure to click the links at the bottom of this article for even more information.
What is a Reverse Mortgage?
A reverse mortgage is a type of home equity loan for older homeowners. Unlike a traditional mortgage where you make monthly payments until it is paid off and you end up owning the property free and clear, with a reverse mortgage, you take out a loan on
the equity of your property and the lender pays you. The money you get is usually tax free and you don’t have to pay the money back as long as you live in your home. If you die, sell the home or move out, you, your spouse (unless he/she is on the mortgage), or your estate must repay the loan, which might mean selling the house. The money can be used to pay medical bills, pay down an existing mortgage, for added income or for a costly repair.
Types of Reverse Mortgages
- Single-purpose reverse mortgages – Are offered by some state and local governmental agencies and some non-profit organizations and must be used for a specific purpose, such as to pay taxes or for home improvements, as specified by the lender. It is the least expensive option.
- Proprietary reverse mortgages – Are backed by the company that offers it. This is a good option if you have a very high appraised value and a small or no mortgage because you may qualify for more funds.
- Home Equity Conversion Mortgages (HECMs) – are federally-insured and backed by the U.S. Department of Housing and Urban Development (HUD). They may be used for any purpose.
Proprietary and HECM reverse mortgages are expensive and there are high upfront costs. How much you can borrow will depend on the type of reverse mortgage you choose, your age, the appraised value of your home, current interest rates and a financial assessment of your ability to pay property taxes and homeowner’s insurance (including flood insurance if you are in a flood zone). You must also maintain your property and pay utility bills and HOA dues, if applicable.
You can elect to get a single disbursement (if you have a fixed rate loan), fixed monthly cash advances for as long as you live in your home, fixed monthly cash advances for a specified time, a line of credit you can draw on or a combination of monthly payments and a line of credit.
Typically, you can take up to 60% of the limit in the first year and there are limits thereafter depending on how much you owe on an existing mortgage. How much you can borrow depends on your age, the value of the home, the interest rate and the lesser of appraised value or the HECM FHA mortgage limit of $679,650.
Qualifications for a Reverse Mortgage
- The youngest borrower must be 62 or older
- You must own your home outright or have a small mortgage and it must be your primary residence.
- You must not be delinquent on any federal debts or property taxes or hazard premiums.
- You must pass a credit check and lenders will evaluate your income, assets and monthly living expenses.
- Your home must meet FHA property standards and flood requirements.
- You can’t owe more than the value of your home regardless of how much you borrow and if the balance is less than the value of your home at the time of repayment, you or your heirs keep the difference.
- If you are married but your spouse is not on a HECM, and you die or move out permanently, your spouse can stay in your home as long as he/she is listed in the HECM documents as your spouse. Your spouse will not get any of the proceeds, however, and must maintain the home, pay taxes and insurance as long as he/she stays in the home.
- If you are in the hospital or a rehab center for longer than 12 months, the loan will become due and payable, which could result in foreclosure, as can defaulting on property charges, property taxes, maintaining property insurance, HOA fees, etc.
- If you are the heir to the estate and the last surviving parent dies, you assume responsibility for the future of the reverse mortgage. You may sell the home or purchase it for 95% of its appraised value.
Costs of a Reverse Mortgage
- The homeowner pays the cost of having the home appraised.
- Closing costs are higher than for a conventional mortgage and are based upon your home’s value.
- There are origination fees (which can be costly), mortgage insurance premiums, third party costs for title search, inspections, recording fees, mortgage taxes and servicing fees.
- As you get money over time, interest is added to the balance you owe each month, and this can add up.
- Unless you have a fixed rate variable reverse mortgage, the rates are tied to a financial index and the market and can go up. Interest rates are usually higher than for a traditional mortgage.
- Reverse mortgages can use up the equity in your home and you may have little to leave your heirs.
Reverse Mortgage Scams
Unscrupulous salespeople who are trying to sell you home improvements or tell you that you need a new roof or a repair you cannot afford, or your homeowner’s insurance won’t cover it, might suggest a reverse mortgage.
Some reverse mortgage salespeople try to induce you to take one out in order to buy an annuity or long-term care insurance, even though, in some cases, it is illegal to require you to purchase products in order to get a reverse mortgage.
Sometimes, a financial planner or investment advisor tries to convince seniors to buy financial products they don’t need and to take out a reverse mortgage to pay for them, or someone who has your power of attorney might take one out in your name and then divert the proceeds.
Unscrupulous realtors convince seniors to take out a “HECM for purchase” so they can buy a lower-cost home without having to put money down, and then divert the proceeds.
If you think you have been scammed or have second thoughts, you have at lease three business days after the closing tocancel the deal for any reason without penalty.
A reverse mortgage may be a good option for you, but you need to do your homework. Learn the facts. Good online resources are www.reversemortgage.org, www.hud.gov, and https://www.consumer.ftc.gov/articles/0192-reverse-mortgages.