Reverse mortgages are a controversial topic in financing and real estate. Often a viable option for those close to retirement or those with considerable equity, a reverse mortgage is essentially a loan that is borrowed against the equity of a home. Equity is the difference between a home’s fair market value and the total balance of all outstanding liens (typically your current mortgage). Equity can increase as you pay down the balance of your mortgage, as your property value increases, or both.
When a homeowner borrows against their equity, they can receive the funds in lumps sums, a line of credit, term or monthly payments over time. Unlike like typical loans or lines of credit, you don’t make regular payments to “pay back” the reverse mortgage. Instead, the amount is to be paid in full upon the borrower/homeowner’s death or sale of the home. At that time, the loan amount, interest, and fees are due at once.
A reverse mortgage is a beneficial way to get cash, especially for seniors who may need assistance with living expenses. In fact, while you don’t need to be above or below a certain income level, homeowners must be at least 62. Homeowners must also have at least 50% equity in their home. They are also required to pay an insurance premium, loan origination fee, loan servicing fees, interest, and mortgage insurance premiums. The Department of Housing and Urban Development (HUD) requires all prospective borrowers to complete a 90 minute counseling session on reverse mortgages to ensure borrowers understand the positives and negatives of borrowing against their equity.
While a counseling session on reverse mortgages may seem excessive, it is crucial for borrowers to understand the consequences and potential pitfalls. Reverse mortgages are a specialty product and cannot be obtained from just any lender. As we recommend to all those considering a loan, it is important to shop around and find a lender that understands and frequently works with reverse mortgages. There are also a large number of scams associated with reverse mortgages. As mentioned above, only those over the age of 62 may qualify for reverse mortgages. Unfortunately, there are many individuals who seek to take advantage of seniors and may convince them to borrow against their home for the wrong reasons. This ranges from family members to need assistance financially and see an easy way to get cash (with no immediate ramifications) or vendors and contractors who may convince seniors to complete home improvements or other upgrades (that aren’t necessary).
As with any home or property, homeowners must remain in good standing and not be delinquent on the conditions stipulated to receive the reverse mortgage. Homeowners are required to live in the home and maintain it. This includes paying property taxes on time and having homeowner’s insurance. If the conditions are not met, it is possible for the home to be foreclosed.
The key to reverse mortgages lies in education and motivation. Not understanding reverse mortgages, including everything that can go wrong, can cause you to lose your home. Additionally, motives are critical as well. Reverse mortgages should not be considered a quick fix or short term solution to anything. It’s important to be educated, choose a reputable lender with experience in reverse mortgages, and meet all the conditions throughout the duration of the loan.