Reverse mortgage is an option for homeowners who want to borrow from their equity in their property. However, unlike other tools used to leverage your home assets, these loans are dedicated to seniors (in most cases, eligibility is limited to ages 62 and older).
While reverse mortgages may be a convenient way to get cash in the Twilight Year, they also pose some significant risks that are not for everyone. Are you considering taking out a reverse mortgage on your home? A reverse mortgage can be a good idea, and when you might want to explore other options.
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Reverse mortgage is a loan designed specifically for older homeowners. They allow you to borrow money from equity you build in your home and turn it into cash, just like a home equity loan or HELOC.
As the name suggests, these loans work in a “reverse” way compared to traditional mortgages. Instead of paying the lender monthly, the reverse mortgage lender pays you. You can choose to use these funds as regular monthly payments, extended credit lines or a one-time payment.
Either way, you don’t need to repay the reverse mortgage until you sell the home, move out permanently, or die – in which case your heirs usually need to repay the outstanding loan balance by selling the property.
The most common type of reverse mortgage loans is a home equity conversion mortgage (HECM) backed by the Federal Housing Administration (FHA). You must be at least 62 years of age to obtain these mortgages. However, you can qualify for a proprietary reverse mortgage at age 55, which is provided by a private lender.
Since reverse mortgages do not require a monthly mortgage, it may be helpful for older people who want to reduce the cost of their families.
They also allow you to age rather than move into a nursing home or assisted living facility. You can do this without having to deal with expensive mortgages, they can provide you with a steady income when your income is limited. This may help if you rely solely on Social Security or get the least amount of retirement savings.
However, reverse mortgage requires you to have a large amount of home equity (usually 50%, according to U.S. reverse mortgage lenders’ financing), so if you don’t have enough accumulation, it may not be feasible. You also have to have funds to keep up with home maintenance, property taxes and home insurance. If not, the lender can cancel the mortgage on your property. Finally, if you still have the balance of the original loan, you will need to pay it off or use reverse mortgage funds to complete it.
Reverse mortgages can be a useful financial tool, but only for the right homeowner. Like any financial product, reverse mortgage has its pros and cons. If you are unsure that you will have funds to pay for long-running property taxes, homeowners insurance and home maintenance costs, you should explore other options so that you don’t lose your home foreclosure.
If you don't plan to stay at home for a long time, reverse mortgage is not a good idea. It can quickly drain your equity (especially if you have an existing mortgage on your home) and significantly reduce profits when you eventually sell the home.
This also applies if you want to leave a heavy legacy for your heirs: reverse mortgages can greatly reduce the things you can betray them, while also making them troubled and headaches because they have to pay off their debts.
In most cases, reverse collateral is safe. But there are always liars. If you are considering reverse collateral, you should be aware of potential scams and frauds.
According to the Consumer Financial Protection Bureau and the Office of the Inspector General of the Department of Housing and Urban Development, this looks like one of the following:
A friend or family member forces you to apply for a reverse mortgage
Someone uses your identity to apply for a reverse mortgage loan under your name
The contractor is trying to convince you that reverse mortgage is the best way to pay for a home renovation or that a specific renovation is required first
You are asked to sign a letter of attorney to get your reverse mortgage funds
The lender's high-pressure sales strategy
Promote you to purchase annuity or investment using reverse mortgage proceeds
If you suspect a potential scam is happening, report it to the Federal Trade Commission, the CFPB, your state attorney general, or your state’s banking regulator.
Reverse mortgages aren’t the only way to get money as you age. If you want to take advantage of the equity you own at home, you can use a home equity loan, a credit loan (HELOC), or current financial funds. All of this makes the borrower turn the home equity into cash, but unlike reverse mortgages, they all require you to pay monthly at some point.
You can also sell and narrow down the home to a smaller place to reduce monthly payments and cash out on some equity you build in the property. Plus, you can rent some extra rooms in your home. This will create additional monthly income you can use to support retirement.
You're even deeper: Reverse Mortgage vs. Home Equity Loan vs. HELOC - Which is the best?
The biggest problem with reverse mortgages is that if you don’t have the grasp of property taxes, home insurance, and home maintenance, it can lead to foreclosure. It also quickly depletes your equity, which may leave you with little or no equity that your heirs pass on to you.
The biggest benefit of a reverse mortgage is that it allows you to turn your home equity into cash and eliminate monthly housing payments. This is very helpful for retirement when you have limited income.
Yes, you may lose your home due to reverse mortgage. This will happen if you can't stay up to date on property taxes, home maintenance and home insurance.
Laura Grace Tarpley Edited this article.