Getting a reverse mortgage isn’t right for everyone. Here’s what you need to know.
If you’re a homeowner age 62 or older, the idea of borrowing against your home with a reverse mortgage may have crossed your mind. After all, you may have seen Tom Selleck, Henry “The Fonz” Winkler or maybe even a couple of Law & Order actors on TV, assuring you that taking out a reverse mortgage on the equity in your home could create more retirement income.
With a reverse mortgage, the homeowner borrows against their home equity, and the lender makes payments to the homeowner – instead of the other way around. That may sound like a sweet deal, but the reverse mortgage industry has a shady past for luring naive homeowners into bad financial situations they couldn’t afford or didn’t fully understand.
Today, more consumer protections are in place to keep borrowers from getting in over their heads financially. Still, a homeowner considering taking out a reverse mortgage should proceed carefully – or sometimes, back away completely – when it comes to a reverse mortgage.
There are three types of reverse mortgages
When deciding on a reverse mortgage, you’ll want to choose the type that best suits your needs. The least expensive option, a “single-purpose” reverse mortgage, is offered by some state and local government agencies. A single-purpose loan can only be used for one purpose specified by the lender, such as home repairs, improvements or property taxes.
Proprietary reverse mortgages are private loans, which are backed by the companies that develop them. If you have an expensive home, you may be able to get a larger loan advance with this type of reverse mortgage, according to the Federal Trade Commission (FTC).
Most reverse mortgages are Home Equity Conversion Mortgages (HECM), which are insured by the Federal Housing Administration (FHA) and backed by the U.S. Department of Housing and Urban Development (HUD).
You must be at least 62 years old and live in the home
To qualify for a reverse mortgage, also known as a Home Equity Conversion Mortgage (HECM), you must be at least 62 years old and reside in the home as your primary residence.
You must also either own the property outright or have paid down your mortgage considerably so that you have a good amount of equity in the home. Then the reverse mortgage lender converts part of the equity in your home into tax-free payments made to you.
You must prove adequate financial resources
When you apply for a reverse mortgage, the lender is required to perform a financial assessment and may even require an amount from the loan to be set aside to pay taxes and insurance for the home during the loan. The “set-aside” will reduce the amount of funds you receive in payments. Meanwhile, you are also responsible for maintaining upkeep on your home.
You’ll pay fees and other costs
Reverse mortgage lenders typically charge an origination fee and other closing costs in addition to servicing fees over the life of the mortgage. Federally insured HECMs may also charge mortgage insurance premiums. You’re also not allowed to deduct interest charged on the reverse mortgage loan on your income taxes, at least not until the loan is paid off either partially or in full, according to the Federal Trade Commission (FTC).
Reverse mortgage loans must be repaid when you die
If you’re the borrower, you, your spouse or your estate won’t have to repay the loan for as long as you live in the home or until you die. Once you’re deceased, however, the loan must be paid.
“If you have a Home Equity Conversion Mortgage (HECM) your heirs will have to repay either the full loan balance or 95% of the home’s appraised value – whichever is less,” according to the Consumer Financial Protection Bureau (CFPB). The loan becomes due and payable upon the death of the borrower, and your heirs have 30 days from receipt of the due and payable notice to buy the home, sell the home, or turn the home over to the lender to satisfy the debt.
“With a reverse mortgage loan, if the balance is more than the home is worth, your heirs don’t have to pay the difference,” says the CFPB. “If your heirs sell the home, the lender will take the proceeds from the sale as payment on the loan, and the FHA insurance will cover any remaining loan balance.”
You must meet with a counselor first
Before you can apply for a HECM reverse mortgage, you must first meet with a counselor from an independent government-approved housing counseling agency. The counselor will explain the reverse mortgage loan’s costs and financial implications. But the counselor must also tell you about possible alternatives to a HECM reverse mortgage such as government and nonprofit programs or a single-purpose or proprietary reverse mortgage.
The housing counselor can help compare costs for different types of reverse mortgages and show you how different payment options, fees and other loan costs will add up over time. To find a reverse mortgage counselor, search the HECM counseling agency directory at hud.gov or call 800-569-4287.
Published by Debt.com, LLC