By Family Caregiver Alliance Kathy, age 59, hates to see her mother Betty struggle with financial constraints. Since Betty’s husband passed away five years ago, her household income has been cut in half. Kathy sees her mother struggling to pay for utilities, medication, food and other household expenses on her reduced income. While Kathy helps as much as she can, she has her own family and career to manage.
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Kathy is now helping her mother investigate the benefits and risks of a reverse mortgage to provide additional income. Reverse Mortgages were originally designed as a “last resort” type of loan to provide additional cash flow for seniors aged 62 and older who owned their own home. However, reverse mortgages have become increasingly popular with younger seniors using the cash to subsidize retirement income or to help pay for long-term care expenses. According to AARP, about fifty percent of the people applying for reverse mortgages in today’s market are under the age of 70.
The Benefits: For a senior like Betty, a reverse mortgage could provide cash flow from the bank, based on the equity in her home either as a lump sum or line of credit. As long has she remains in the home, no payment is due on the loan and the additional cash can be used as needed. As part of receiving the loan, Betty will need to continue paying her property taxes and house insurance, and has to keep the house in good shape.
According to Bankrate.com there are several types of “reverse mortgages.” The Home Equity Conversion Mortgage (HECM) is a type of reverse mortgage offered by the Federal Housing Administration (FHA). HECM loans are only offered through HUD-approved mortgage lenders, banks, and credit unions, and are the most popular, accounting for about 90% of reverse mortgages. Meeting with a HUD-approved housing counselor is required prior to receiving a HECM loan.
Other types of reverse mortgages include single-purpose mortgages (sometimes offered by state or local governments) and proprietary reverse mortgages. If Betty decides to move out of the home or upon her death, the bank will require the sale of the home and use the proceeds to pay off the loan as well as the fees and interests associated with the reverse mortgage. HECM loans include insurance, which is especially important with the recent mortgage meltdown. If the sale of her home does not cover all of the fees, the estate/family owes nothing. If there are funds left over after paying off the mortgage, then the proceeds will go back to the heirs of the estate. Income from reverse mortgages typically doesn’t affect a senior’s social security or Medicare eligibility and can be used as the senior desires. These benefits can take the financial burden off of a family and enable a senior’s estate to pay for long-term care or living expenses when other means are not available.
While reverse mortgages can provide a financial lifeline, there are a number of issues to consider when deciding if a reverse mortgage is the best strategy for your financial situation.
Things to Consider: Fees associated with reverse mortgages can be quite high. While the interest rate is set by the government, banks may charge up to 5% of the home’s value as a “fee” that will be taken out of proceeds from the sale of the home when the loan ends. Other pitfalls include getting – and then spending – a lump sum payment too quickly, leaving seniors with no cushion if they use all of their resources. An alternative is to set-up the mortgage so that you receive monthly payments from the bank instead of one lump sum. For seniors who are married, another issue to consider is whether or not to put both people on the loan.
Ron Lieber, who covers personal finance for the New York Times, suggests putting both people on the loan. Because a home is the largest asset that many people own, Lieber also suggests getting reverse mortgage counseling from at least two people from two different organizations. The National Council on Aging recently launched a new website, called “Home Equity Advisor.” The website includes information on alternatives to reverse mortgages as well as things to think about prior to getting a reverse mortgage. After answering several questions related to your situation, including your income, amount of equity in your home, and your preferences on remaining in your home vs. moving, the website provides you with several options to consider.
Conclusion: While reverse mortgages are not the solution for every senior, they may be a savior for cash poor seniors whose income is insufficient to cover their living expenses. Resources where you can learn more:
- AARP: Reverse Mortgage Loans Borrowing Against Your Home
- Bankrate.com “The Ins and Outs of Reverse Mortgages”
- HUD.Gov “FHA Reverse Mortgages (HECMs) for Seniors”
FAQs
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.
What's the downside to a reverse mortgage? ›
But the risks can be serious — reverse mortgages come with high upfront costs and can make you ineligible for some government benefits. Plus, since the loan has to be repaid upon your death (which often means selling the house), you may not have an inheritance to leave for your heirs.
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.
Who really benefits from a reverse mortgage? ›
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 is 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.
What's the catch with chip reverse mortgage? ›
Cons. Higher interest rates compared to traditional mortgages and some HELOCs. Fees that could add thousands of dollars to the cost of your reverse mortgage. Exchanges long-term equity growth for short-term financial flexibility.
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.
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.
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.
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.
Best reverse mortgage lenders
- Best for variety: Finance of America Reverse.
- Best brick-and-mortar: Mutual of Omaha Reverse Mortgage.
- Best streamlined experience: Guild Mortgage.
- Best for speedy closing: Fairway Independent Mortgage Corporation.
- Best for those under age 62: Longbridge Financial.
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.
What is the dark side 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.
Why do reverse mortgages have a bad reputation? ›
Part of the reason reverse mortgages have developed a bad reputation is because of the temptation they provide to more quickly deplete your asset base, creating financial hardships for later in retirement.
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.
Are reverse mortgages bad for seniors? ›
Reverse mortgages are extremely expensive and should only be used as a loan of last resort. Borrowers must pay both upfront and ongoing fees. The ongoing costs are often financed into the loan and seniors may be unaware of just how quickly the fees add up.
How many people lost their homes to reverse mortgages? ›
A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.
Is it hard to sell a house with a reverse mortgage? ›
Selling a home with a reverse mortgage in California is certainly feasible, and with the right preparation and guidance, it can be a beneficial decision. Remember, every homeowner's situation is unique, so it's important to consider your individual circ*mstances and seek professional advice.
