Reverse Mortgage: hailed as a blessing by some, assailed as dangerous by others. Let's see why…
Consider seniors who aren’t ready to sell but need to support monthly expenses. These days Social Security probably doesn't quite cut it (you may be able to identify!). Now those folks have the option to take out a new kind of mortgage where the bank pays them – say what?
In fact it’s true … and it looks good on its cover … and it’s very important to peek inside for further details.
That’s exactly what we do below in Reverse Mortgage Explained: peek inside and review the facts so that you are better informed. We have no reason to persuade you one way or the other if you are considering such a loan. We gain nothing financially based on the decision you make. Be sure that’s true of any financial advisor you may be listening to as well!
Consider the facts: lots of seniors are trying to get by on Social Security. If they remain in their homes – even if those homes are fully paid for – they still cope with monthly expenses like insurance, property taxes, utility bills, maintenance and repair costs and so on. Many need some help and tapping the equity they have worked hard to build in their homes looks like a reasonable place to start…
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'Important Update May 2019 A new wrinkle in the Reverse Mortgage world has recently been highlighted in the Wall Street Journal. While most existing reverse mortgages are HECM’s, or financial products that are federally insured and have safeguards as well as limitations. A new variation is a HELO, or Home Equity Loan Optimizer. It’s a proprietary product(currently offered by Quicken Loans) that has a much higher limit ($4 million) than the HECM’s. Now seniors in high home value areas as can take considerable funds out of their homes and use them for whatever they wish without tapping other resources. An additional appealing aspect is the the HELO funds are considered loan advances and are not taxable as income according to reports we have read. Always consult with a trusted financial advisor before getting into a traditional HECM or the new HELO.
News September 2018 Though some consider reverse mortgages to be risky at best and fraught with peril at worse, opinions appear to be changing. As new regulations have made this option safer assessments have grown more favorable as well. A recent report in USA Today even highlights this option as a potentially wise choice as early as age 62 (a Reverse Mortgage with a Line of Credit). One benefit noted is that the line of credit grows at a rate more rewarding than a typical conservative investment account. There are still caveats but this certainly an option worth looking into with experts — and with your eyes wide open.
April Update 2018
Last October (2017) some new laws went into effect regarding reverse mortgages. The changes could make reverse mortgages less appealing to seniors, though most experts say that they are still worth looking into. The new rules reduced the maximum loan amount that borrowers can take — this is called the “Principal Limit Factor” or PLF. The PLF used to be 60 to 70% of the home’s value, but now it will depend not only on the value of the property but also on the borrower’s age and loan rates. The good news is that though HUD the upfront insurance premium required for many borrowers, they have reduced the annual insurance premium required from1.25% to .5%, so the debt on the mortgage will rise more slowly.
Update October 2017
The Department of Housing and Urban Development (HUD) offers a unique kind of home loan which can help supplement the incomes of seniors .Formally called the “Home Equity Conversion Mortgage.,” they’re also known as Reverse Mortgages. HUD lists some of the most important things to know about them as summarized here:
- You have to own your home and be at least 62 years old to qualify;
- You don’t have to have FHA mortgage insurance to qualify;
- The Reverse Mortgage pays you and does not need to be repaid until the house is sold;
- Though you don’t make payments on the mortgage you do have to continue to pay property taxes, have hazard and flood insurance and pay your utilities.
- The amount of money you can get depends on the borrowers’ ages, interest rates and the value of the home.
- Single family homes or 2-4 unit homes are eligible;
- there are a variety of ways you can receive the money in terms of timing (e.g. monthly equal payments; lump sum; variable amounts at times you request; and
- You should not deal with any service provider that charges money to refer you to an approved lender. You can easily go to HUD.gov to see a list of approved lenders near you. And if you have any questions you can call the National Council on Aging for help finding a trustworthy counselor to guide you.
Update June 2017 We must emphasize how important it is for you to have a trusted financial counselor AND a reputable lender if you are considering a reverse mortgage. These mortgages can be a terrific financial tool but you must beware. There is a current court case accusing a businessman of cheating borrowers to the tune of $7 million. Allegedly he either falsified applications or did not present actual terms to the borrowers. And he had title companies issue to checks rather than the borrower and never gave the money to the borrowers but just kept if for himself. Please be sure to heed all the advice in this article!
Update March 2017 Typically older retirees are the most likely to take out a reverse mortgage. However, some new trends are making them more appealing to those closer to age 62 (the minimum age requirement for a reverse mortgage). However, these younger retirees are advised only to add the reverse mortgage credit line to their plan, but not to draw on it unless it is absolutely necessary. That way the credit line will grow along with rising rates, and it could provide protection against inflation. Some call this a “Standby Reverse Mortgage.” They are obviously not easy to understand, and they do have their own downsides. So if you think it might be of interest to you be sure to speak with a knowledgeable and trusted advisor.
Reverse Mortgage News November 2016 Did you know that Reverse Mortgages can now be used to purchase a home? Pretty amazing — and still a little confusing. Seniors who are 62 years old or more can buy a house which will be their primary residence by making a down payment and paying the closing costs. They are then given a loan in a lump sum that is put toward the purchase of the home. They will have no monthly payments to make on the loan. Instead, like with a reverse mortgage, interest will accrue on the loan amount. The loan and interest are not due to be paid until the spouse or last co-borrower on the loan moves out or dies. The same caveats that we describe in this article also apply to HECM (Home Equity Conversion Mortgages) purchases. Read the information below to get a basic understanding. And be sure to confer with a trusted advisor who has no stake in whether you do or do not use a reverse mortgage either to get equity out of your existing home or to buy a new one.
Reverse Mortgage News August 2016 Reverse Mortgages may be on the verge of being a well known term: a leading lender is rolling out a new tv ad campaign featuring the popular award winning actor Tom Selleck. They want to offer a more compelling vision of reverse mortgages and explain why they are now a much safer and more reliable option than they were before new policies and safeguards were put into place. They emphasize the fact that for many, savings and social security are not cutting it in today’s economy — especially when much of many retirees nest eggs are tied up in their homes.
It’s true that reverse mortgages are much better regulated these days, and they could be an important part of retirement planning. So if you’re interested, all the more reason to check out the pros and cons spelled out below, then see what your friend Tom has to say!
News: In April of 2015 new rules regarding Reverse Mortgages were implemented by the Department of Housing and Urban Development. Though the rules add to the requirements for getting a reverse mortgage, they also provide important protections to both the borrower and those providing these mortgages. The new rules require the mortgagees to determine whether potential borrowers will be able to meet specific, necessary financial obligations. They will also look more carefully at borrowers’ reasons for getting a reverse mortgage and require more documentation. These measures will ensure that borrowers have the financial means to keep up payments such as insurance and property taxes in addition to enjoying additional cash flow.
While Reverse Mortgages were considered questionable when they first came on the market, things have changed. They’re now getting some respect, as new regulations increase protections for the homeowner as well as the borrower’s spouse. They have also limited how much equity can be taken as a lump sum when the mortgage begins. As a result there are fewer defaults since the borrower is less likely to spend more than is prudent. Another new requirement is that the borrower be able to show they will be able to pay the insurance policy on their home as well as their property taxes. And one of the best features of the reverse mortgage: the borrower is never held liable in the event of negative equity — i.e. if the balance on the mortgage is at some point greater than the home’s value. In that case, federal insurance will cover the difference — not bad!
Earlier this year the Wall Street Journal reported that Reverse Mortgages could be a useful tool for retirees to increase their cash flow without increasing their tax rate or their taxes. They did so in comments about statements made by a “professor of retirement income” at The American College in Bryn Mawr, Pennsylvania (who knew there was such a course?!). Since Reverse Mortgages are a type of loan and the payments are not taxed, they can be a good way to have more income without going into a higher tax bracket. Sounds good, but there has also been some criticism about Reverse Mortgages.
Some of the criticism of Reverse Mortgages has decreased due to stricter regulations. There are new limits to how much equity homeowners can borrow against in the first year of the loan, and also new requirements regarding the homeowner's ability to continue to pay insurance and property taxes. These were imposed by HUD (the U.S. Department of Urban Development). In a 2015 article in the Wall Street Journal a reverse mortgage is one tool included in a proposed scenario for increasing retirees' annual income. So while they should be entered into only after serious consideration, they are basically good vehicles for increasing cash flow at certain times in your life.
So just how does a Reverse Mortgage work? Think about a regular mortgage: you borrow money from a bank with your new house as collateral. Each month you make a payment that pays interest on the loan as well as an amount that reduces the principal balance outstanding. Gradually, if all else stays the same, year after year as payments are made the balance owed steadily goes down.
When you get to a point where you have either paid off the entire balance and own the house outright, or you have paid enough so that your equity ownership is quite a high percentage, the bank becomes interested in a different kind of deal. Unlike having to qualify for a home equity loan which depends heavily on income, with a Reverse Mortgage you are borrowing against the equity you have built in your home. The bank pays you, either a monthly amount or an initial lump sum, and the balance now goes up rather than down each month. The loan does not have to be repaid until you die, you move out, or you sell the house.
There are some additional advantages detailed in the discussion below. There are also disadvantages — and these can end up being scary for the misinformed. If you know the facts you will understand (1) whether a Reverse Mortgage may be right for you; (2) the pros and cons of a reverse mortgage and (3) the implications of your decision.
While Reverse Mortgages can be attractive and may in fact be a good solution for you, you should be aware that they tend to be more expensive than other borrowing options. For example, according to a review of reverse mortgages by the Motley Fool (a respected investment advisor), if you were to take out a $100,000 reverse mortgage (i.e., the bank is going to pay YOU $100,000), you will typically pay close to $9000 in fees and other closing costs. That’s pretty expensive considering that you can get a Home Equity Loan with no closing costs at all, an interest rate probably under 4% and an annual fee under $100. Of course, you would have to make monthly loan payments, which is not the case with a reverse mortgage.
So: put emotion aside, have those who might profit from your decision stand back for a bit, and let’s consider whether such a loan has a role in your future:
For starters there are some basic eligibility requirements, so if you don’t meet those then the whole discussion is moot:
- You must be at least 62 years old. Any co-borrower must also be 62 years or older.
- You have to own your home or else have paid off a very high portion of the mortgage.
- You must have enough money to be able to pay ongoing expenses like your property taxes, homeowners insurance, etc.
- Your home must be either single-family or at most a 2-4 unit dwelling
- You must live in the home as your primary residence
- You have a counseling session with a counselor approved by HUD.
If you meet those requirements it may be worth reading on to understand the loan’s upside and downside:
- You do not have to make payments on a Reverse Mortgage
- You are still the owner of your home – the lender does not take the title
- You can increase your income and live more comfortably
- You can take advantage of the equity in your home without having to sell it
- Reverse mortgages are backed by the Federal Housing Administration
- The loan does not come due until you no longer live in your home
- You have options in terms of how you receive your funds (lump-sum, monthly payments, etc.
- Reverse mortgages are expensive compared to other types of mortgages. The total of fees and closing costs can reach as much as $40,000 and the amount is added onto to the amount of your loan.
- The amount owed on the loan increases over time (the opposite of a traditional mortgage)
- If you take your money as an initial lump sum and spend it too quickly, you can get into serious trouble: your debt continues to rise but you no longer have your money. Because lump-sum payouts can be more profitable for lenders, they may try to steer you in this direction even if it really is not your best choice.
- By definition this loan reduces the equity in your home and will leave less for your heirs.
- If you should require assisted living or nursing home care and have to move out of your home, your loan payment would become due.
- Only the parties named as co-owners on the loan have the right to remain in the home. If only one spouse is named on the loan and has to move out for health reasons, the other spouse would also be forced to leave.
- The older you are when you take out such a mortgage, the more you can qualify to receive. Wait as long as you can before making such a move.
- The amount of your debt will include the money you receive and a relatively expensive package of fees and closing costs. You are required to include FHA mortgage insurance along with other expenses.
- Your debt continues to increase until it is paid off.
- Your debt becomes due when you (and named co-borrower) move out of the home, whatever the reason.
- Your debt increases over the life of the loan due to both interest and your lender’s monthly servicing fee.
- You must keep up with insurance and property tax payments or risk foreclosure (and your loan becoming due).
- Many professionals recommend that you consider a reverse mortgage to be a last resort, not to be used unless absolutely necessary. They also favor the Line of Credit payout option so that you only accrue interest on the amount of money you use. And, the amount of money that you are able to borrow continues to grow over time.
Also remember that you may have other options. Perhaps it would be advisable for you to sell your house and reduce your living expenses. Check Grants to Pay Billsfor ideas to reduce your expenses. And read I Need Help for tips on bringing in some extra cash. If you can qualify for a Home Equity Loan or Line of Credit – and are sure you can make the payments – that may be a less risky route to take. And as we warned earlier, make sure you know the motives of the person you are trusting to advise you.