Reverse Mortgages: Get the Facts

For many seniors with equity in their homes, reverse mortgages are an appealing opportunity. In a conventional mortgage, homeowners make monthly mortgage payments to their lender and build equity over time in their home. Conversely, in reverse mortgages, homeowners receive money from their lender, with the understanding that they are in essence drawing down equity from the property. Reverse mortgages provide homeowners with the opportunity to turn equity from their home into income, while keeping the title to their home.

The most common type of reverse mortgage, the Home Equity Conversion Mortgage (HECM), is insured by the federal government. HECM borrowers can draw down the proceeds from their reverse mortgage as a lump sum, as a monthly payment, or as a line of credit.  The total loan amount is typically about fifty to sixty percent of the home value and is based primarily on three key variables: the value of the home, the age of the youngest borrower or the non-borrowing spouse, and the amount of debt left on the home. Qualifying homeowners are at least 62 years old.  There are no monthly mortgage payments, and loan repayment is not due until the borrower sells, moves out, or passes away.

While there are no income or employment qualifications to qualify for a HECM reverse mortgage, there are several other requirements:

• • • The borrower must be at least 62 years old

    • The borrower must own the property

    • The borrower has a proven ability to afford property taxes, homeowners insurance, maintenance, and other property costs

    • The borrower must have no delinquent federal debt

    • The borrower must receive HECM counseling from a HUD approved HECM counselor

    • The property must be the borrower’s primary residence

    • The property must be a 1-4 family home or condo

A reverse mortgage can be a great fit for many elderly homeowners who have significant equity in their homes or own their homes outright. That said, there are numerous potential pitfalls that a homeowner considering an HECM should be aware of.

For starters, homeowners should watch out for scammers who push borrowing against their home, even when the homeowner doesn’t need to — or worse yet, when they can’t afford to in the long run. As the AARP advises, “If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that’s generally a good sign that you don’t need it and shouldn’t be buying it.”

Additionally, while reverse mortgages have historically been advertised as safe, effective, and government-insured, there are underlying risks that could very easily lead a homeowner into foreclosure or jeopardize the inheritance of a home intended to be passed down to an heir. Anyone considering a reverse mortgage should understand the following:

• • • Reverse mortgages can be very expensive and not worth the upfront costs, particularly if the homeowner is planning to stay in the home for only a couple more years. Closing costs and fees are high: in some cases, as costly as $15,000 on a $200,000 loan.

    • While homeowners are not required to make monthly mortgage payments, they are responsible for paying property taxes, homeowners insurance, and maintenance costs. If a homeowner cannot meet these obligations, the lender can foreclose on the home to protect its interest in the property.

    • As the home’s equity is drawn down and the loan amount increases, the interest and mortgage insurance charged on the loan balance and amount owed will also increase. Homeowners should, therefore, withdraw only what they truly need for retirement and other critical expenses in order to  avoid paying more interest and mortgage insurance than they have to.

    • At some point, if the property is intended to stay in the family, someone will need to pay back the loan in order to keep the home. If passing the home to the homeowner’s children or heirs is a priority, getting a reverse mortgage may jeopardize that plan in the absence of proper estate planning.

    • Because homeowners are drawing out equity from their home, fewer assets remain for their heirs. If someone intends to leave all the equity they’ve built up in their property to their heirs, a reverse mortgage would not be the right solution.

For a select group, reverse mortgages can be a great route to a stable retirement and additional income in years where certain expenses, particularly medical expenses, could otherwise exceed income. But clearly, there are risks that must be understood before taking one out. If you or a family member are considering a reverse mortgage, there are resources available to help you determine whether it’s the right choice for you. Many organizations, including the National Consumer Law Center,  NeighborWorks, and AARP, have online resources available to help you understand the risks involved. Furthermore, many local organizations like our Network Partner Jewish Association Services for the Aged (JASA) have counselors who are certified in HECM counseling and are experts on reverse mortgages.

Want to learn more? Check out:

• • The Federal Trade Commission’s Guidelines on Reverse Mortgages

  • The Department of Housing and Urban Development (HUD)’s HECM Requirements