Like any loan, it's best to approach a reverse mortgage with caution. Knowledge is key.
Suze Orman is nothing if not passionate about her followers, and a series of calls and emails from fans seeking advice has gotten the financial guru worked up. The calls deal with reverse mortgages and whether they are a good idea.
What is a reverse mortgage?
A reverse mortgage is much like a home equity loan in that seniors can tap into the existing equity in their homes. The major difference is that a reverse mortgage is repaid with interest, only when the homeowner dies or sells the property.
What are the rules of a reverse mortgage?
Reverse mortgages are designed to help seniors find the money they need to age in their own homes. Here are the rules associated with a reverse mortgage loan:
- A homeowner must be 62 years of age or older.
- They must own the home outright or have a substantial amount of equity in it.
- The property must serve as the senior's primary residence.
- They must receive counseling from a HUD-approved reverse mortgage counseling agency. During this meeting, the counselor and homeowner will discuss eligibility, financial implications, and alternatives to a reverse mortgage.
It's risky, says Orman
If landing a traditional mortgage once felt like a breeze, the same may not be true of a reverse mortgage. Like all loan types, there are risks associated with reverse mortgages.
Taking a loan too early
The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.
Once they sell, a homeowner must repay the reverse mortgage with interest. If they're in financial distress, it will only be made worse by having a loan hanging over their head.
Not understanding how the loan works
Orman spoke of a 71-year-old listener named Carol. Carol has severe COPD and an income of only $1,500 to $1,600 per month. At the time of her husband's death, Carol had $53,000 remaining on her mortgage. When someone called her to convince her to take out a reverse mortgage, they made it seem like her financial situation would improve.
Any money owed on the original balance is deducted from the amount the homeowner can borrow, and the original mortgage is paid off. "All of a sudden, she owes $90,000 on this reverse mortgage. The house is only worth $148,000, so she's only going to get like $60,000, and she can't do anything with that now. If she simply had sold the house, to begin with, we could have figured it out from there because owning a home is expensive," Orman said.
Homeowner expenses continue -- even after a reverse mortgage
Homeownership can be expensive, even after taking out a reverse mortgage. According to the Consumer Financial Protection Bureau (CFPB), even after being approved for a reverse mortgage, a homeowner remains responsible for paying ongoing property charges. These expenses include taxes, insurance, maintenance, and repair costs.
While the idea of a reverse mortgage may seem sound, it's important to approach such loans with an abundance of caution.
FAQs
Taking a loan too early
Why do banks not recommend reverse mortgages? ›
While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky: A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.
What is the 95% rule on a reverse mortgage? ›
If your reverse mortgage loan is in default and you've received a notice that the loan is “due and payable,” you may sell your home for 95 percent of its appraised value.
What is the major disadvantage of reverse mortgage? ›
A big downside to reverse mortgages is the loss of home equity. Because you're not paying down your reverse mortgage balance, you'll make less profit when you sell, or limit your borrowing power if you need a new loan. You'll pay high upfront fees.
What is the truth about reverse mortgages? ›
If you're a homeowner aged 62 or older, a reverse mortgage can help you obtain tax-free income, allowing you to stay in your home, pay bills, supplement your income and more. A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes.
What's better than a reverse mortgage? ›
Alternatives to a reverse mortgage include home equity loan, home equity lines of credit, and cash-out refinances. These financial products can help you tap the equity in your home to use as cash for other purposes.
Who benefits most from a reverse mortgage? ›
Older adults with significant home equity
If you have a lot of home equity, then a reverse mortgage can be a useful way to turn that into cash without taking on extra monthly payments. You can then cover expenses or supplement your existing retirement income.
Is it hard to sell a house that has a reverse mortgage? ›
Selling a house with a reverse mortgage isn't as simple as selling a home with a traditional mortgage — but it can be done with a little planning. With a reverse mortgage, you borrow against the equity in your property to receive cash upfront or a stream of monthly payments.
Can you lose your house with a reverse mortgage? ›
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
What is the 60% rule in reverse mortgage? ›
According to this rule, the initial amount that a homeowner can borrow through a reverse mortgage is limited to 60% of the home's appraised value or the maximum claim amount, whichever is less.
Television commercials for reverse mortgages commonly extol the benefits of a guaranteed tax-free income for homeowners aged 62 and older. However, reverse mortgages can be expensive and, in some cases, put a person's biggest asset—their home—at risk.
Who is not a good candidate for a reverse mortgage? ›
Who is not a good candidate for a reverse mortgage? A reverse mortgage is a questionable proposition if you have sufficient income to pay your bills or are willing to sell your home to tap into the equity. If that's the case, it may make more sense to just sell it and downsize your home.
What happens if you live too long on a reverse mortgage? ›
If the end of your term is up before you pass away, then you have outlived your reverse mortgage proceeds. With a term payment plan, you reach your loan's principal limit—the maximum that you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.
What percentage of seniors have a reverse mortgage? ›
Based on data from the United States Census Bureau, only 2-3% of eligible Americans have a reverse mortgage, which suggest this is merely a niche financial product that appeals to a minority of seniors.
What does Suze Orman think about reverse mortgages? ›
Suze Orman's opinion on reverse mortgages
She has spoken out against these loans on numerous occasions, warning that they can be a risky financial decision for many older Americans. One of Suze's main concerns with reverse mortgages is that they can be incredibly expensive.
How much money do you actually get from a reverse mortgage? ›
The amount of money you can get from a reverse mortgage usually ranges from 40% to 60% of your home's appraised value. The older you are, the more you can receive because loan amounts are based on your age and current interest rates.
Why do people hate reverse mortgages? ›
Smaller Inheritances and Greater Hassles for Any Heirs
A reverse mortgage can also deplete much of the homeowner's wealth, especially if their home is basically all they have, leaving little behind for their heirs.
Can I lose my home with a reverse mortgage? ›
It depends on whether there are coborrowers or an eligible nonborrowing spouse. If there are neither, to keep the home, heirs must pay the full loan balance. To sell it, they must repay the full loan balance, or at least 95 percent of its appraised value if the loan balance owed is more than the home value.
Is reverse mortgage a trick? ›
No, reverse mortgages are not scams. They are legitimate loans designed for seniors, but it's essential for borrowers to fully understand how they work. Interest accrues on the loan over time and is repaid when you leave the property.
