Perhaps when the term, “reverse mortgage” comes to mind, you conjure images of an aging, former celebrity espousing its benefits for senior adults in an infomercial. As with other similar advertisements that have a similarly predatory feel, it is important to pay close attention to the details of reverse mortgage products for yourself or for a loved one. Just because a former senator, Thomas Magnum (P.I.), or Fonzie from Happy Days seem trustworthy in their advertising, does that mean a reverse mortgage is a wise investment?
What actually is a reverse mortgage?
According to Oxford Languages, a reverse mortgage is defined as, “A financial agreement in which a homeowner relinquishes equity in their home in exchange for regular payments, typically to supplement retirement income. Unlike traditional mortgages, which decline as you pay down the loan, reverse mortgages rise over time as interest on the loan accrues.”
Consumer Financial Protection Bureau reports that there are several kinds of reverse mortgage loans: (1) those insured by the Federal Housing Administration (FHA)–which are mostly referred to as Home Equity Conversion Mortgages (HECM); (2) proprietary reverse mortgage loans that are not FHA-insured; and (3) single-purpose reverse mortgage loans offered by state and local governments.
If a traditional, forward mortgage works with a borrower taking out a loan and making payments on the loan over time, a reverse mortgage is one where upon reaching the age of 62, a person may use his home equity to borrow against the value of the home and receive funds as either a lump sum payment, a fixed monthly payment, or in the form of a line of credit. The total of the loan is due when either the homeowner sells the home, movies out permanently, or dies. The homeowner retains the title to the home, but over time the homeowner’s debt increases while their home equity decreases.
Who qualifies to get a reverse mortgage?
Investopedia shares, “While reverse mortgages don’t have income or credit score requirements, they still have rules about who qualifies.” A homeowner must be at least 62 years old and must either own the home free and clear or have a substantial amount of equity (at least 50%).
Borrowers are required to pay an origination fee, an up-front mortgage insurance premium, other standard closing costs, ongoing mortgage insurance premiums (MIPs), loan servicing fees, and interest. The federal government limits how much lenders can charge for many of these items.
What are the cautions about reverse mortgages?
First, be sure to fully understand the costs and fees associated with reverse mortgages. Costs like interest, origination fees, closing costs, as well as insurance. Next, it should be noted that most reverse mortgages come with very specific rules and guidelines. As an example, if a homeowner fails to reside in the home for more than a year, fails to follow maintenance guidelines, or fails to stay current on property taxes, a lender may foreclose on the home.
Finally, since reverse mortgages are for the 62 and older crowd, there have unfortunately been many cases of scams and fraud. Whether it is a service provider preying upon senior adults to get them to pay for home services that are never rendered or sadly, even family members taking advantage of powers of attorney to sign over proceeds from the reverse mortgage, it is wise to tread carefully into the waters of this type of mortgage loan.
So, then, what are the benefits?
Most experts agree that a reverse mortgage should be used as a very last resort or in an emergency situation only. However, it does offer borrowers the opportunity to access the cash value of their home equity if they don’t have other liquid assets to help with retirement in the form of supplemented fixed retirement income.