Reverse Mortgages
A reverse mortgage is a special type of home loan that lets a homeowner 62 years of age or older convert a portion of the equity in his or her home into cash. The equity built up over years of home mortgage payments can be paid to you. You can turn the value of your home into cash without having to move or to repay the loan each month as long as you live there.
The cash you get from a reverse mortgage can be paid to you in several ways:
- All at once, in a single lump sum of cash
- As a regular monthly cash advance
- As a "credit line" account that lets you decide when and how much of your available cash is paid to you
- As a combination of these payment methods.
No matter how this loan is paid out to you, you typically don't have to pay anything back until you die, sell your home, or permanently move out of your home.
The purpose of a reverse mortgage is different from that of a traditional "forward" mortgage. The purpose of a forward mortgage is to purchase a home. The purpose of a reverse mortgage is to get cash from your home.
In a forward mortgage, your loan balance (the amount you owe) gets smaller with each monthly payments to the lender while the value of your home usually increases. In other words, your home equity grows larger over time as your debt decreases. Forward mortgages are "falling debt, rising equity" loans.
In a reverse mortgage, your loan balance (debt) rises each time you get money from the lender, as interest is added to the outstanding loan balance, and you make no repayments to the lender. Unless the home's value grows very fast, the loan balance starts "catching up" to it. Reverse mortgages are typically "rising debt, falling equity" loans.
Despite its drawback, reverse mortgages are preferable options when it comes to paying for your healthcare costs, remodeling your home, making a big purchase and changing your lifestyle. Moreover, if you have debts to pay off, need money for someone's education or make plans to go on a vacation, reverse mortgages are worth considering.
The three basic types of reverse mortgage are:
- Single-purpose reverse mortgages - offered by some state and local government agencies and nonprofit organizations. Single-purpose reverse mortgages generally have very low costs. But they are not available everywhere, and they only can be used for one purpose specified by the government or nonprofit lender, for example, to pay for home repairs, improvements, or property taxes. In most cases, you can qualify for these loans only if your income is low or moderate.
- Proprietary reverse mortgages - private loans that are backed by the companies that develop them.
- Federally-insured reverse mortgages - known as Home Equity Conversion Mortgages (HECMs) which are backed by the U.S. Department of Housing and Urban Development (HUD). HECMs and proprietary reverse mortgages tend to be more costly than other home loans. The up-front costs can be high, so they are generally most expensive if you stay in your home for just a short time. They are widely available, have no income or medical requirements, and can be used for any purpose.
Before applying for a HECM, you must meet with a counselor from an independent government-approved housing counseling agency. The counselor must explain the loan’s costs, financial implications, and alternatives. For example, counselors should tell you about government or nonprofit programs for which you may qualify, and any single-purpose or proprietary reverse mortgages available in your area.
The amount of money you can borrow with a HECM or proprietary reverse mortgage depends on several factors, including your age, the type of reverse mortgage you select, the appraised value of your home, current interest rates, and where you live. In general, the older you are, the more valuable your home, and the less you owe on it, the more money you can get.
The HECM gives you choices in how the loan is paid to you. You can select fixed monthly cash advances for a specific period or for as long as you live in your home. Or you can opt for a line of credit, which allows you to draw on the loan proceeds at any time in amounts that you choose. You also can get a combination of monthly payments plus a line of credit.
HECMs generally provide larger loan advances at a lower total cost compared with proprietary loans. But owners of higher-valued homes may get bigger loan advances from a proprietary reverse mortgage. That is, if you have a higher appraised value without a large mortgage, then you may likely qualify for greater funds. Location (for example, your neighborhood) is only one part of the determination of appraised value.
Be cautious if anyone tries to sell you something, like an annuity, and suggests that a reverse mortgage would be an easy way to pay for it. If you don’t fully understand what they’re selling, or you’re not sure you need what they’re selling, be even more skeptical.
Keep in mind that your total cost would be the cost of what they’re selling plus the cost of the reverse mortgage. If you think you need what they’re selling, shop around before you buy.
If you suspect that anyone is violating the law, let the counselor, lender, or loan servicer know. Then, file a complaint with:
Whether a reverse mortgage is right for you is a big question. Consider all your options. You may qualify for less costly alternatives. For more information on reverse mortgages, visit AARP.