Is a Reverse Mortgage Right for You?
Feb. 1, 2023 Blogging for Change
For many people, their home is their most valuable asset. And while tapping into the value of your house might seem like a great way handle expenses when money is tight, the terms of a reverse mortgage aren’t necessarily in your best interest, and there may be a better way to balance your finances.
Whether a reverse mortgage is right for you is nuanced. The short answer? It depends. Here’s what to know and a few considerations for moving forward.
What is a Reverse Mortgage?
A reverse mortgage is a type of loan that allows homeowners ages 62 and older to convert part of the equity in their homes into tax-free income with no obligation to repay while they live in that home. You’ll need to own the property outright, or at least have a significant amount of equity built up. Once the borrower dies or moves out, the lender is repaid from the home sale (or the borrower’s heirs repay the loan if they want to keep the house).
Typically, if the borrower passes away, their spouse can stay in the home, but rules may vary so it’s important to understand the fine print to know what’s required if there are two of you.
Despite the name, these loans aren’t the true reverse of a traditional mortgage. The lender is not attempting to buy the property from you. Instead, the lender is simply loaning money which is secured by the home’s equity. When the homeowner/borrower dies, permanently moves out, or sells their home, the reverse mortgage comes due and must be paid in full.
Payment terms can vary. Some borrowers choose to get a lump sum payment, while others choose a line of credit or periodic payments. Whatever you choose, the infusion of cash can be appealing to people who don’t have enough saved to manage retirement, or simply come up against unexpected expenses and have no other way to generate income.
Types of Reverse Mortgages
Homeowners have access to three different types of reverse mortgages. The most common is the HECM (home equity conversion mortgage), but there are also the single-purpose reverse mortgage and the proprietary reverse mortgage. Here’s what to know about each.
Home equity conversion mortgage
The HECM is federally insured, which means it’s backed by HUD, and it’s the most popular because it has the fewest restrictions. It has no income or medical requirements, and no requirements for how the money is used. It does require the home to be your primary residence. Other terms include the following:
- Tends to have the highest upfront fees (often the most expensive option overall)
- Counseling is required before you can close (MMI offers this counseling)
- Comes with a variety of payment options:
- Credit line you can draw from whenever you want
- Term option with monthly cash advances for a set period of time
- Tenure option with continuous monthly payments for as long as you own and occupy the home (it must remain your primary residence). You should consider your health and your ability to remain in the house rather than, say, an assisted living or memory care facility.
Besides being at least 62, you must either own the house outright or have paid a significant portion of the mortgage. You also can’t be delinquent on any type of federal debt. HUD sets an annual cap on HECM borrowing, and for 2023 it’s $1,089,300. That might sound attractive, but there are a few other terms as well, which is why it’s important to explore all the details before deciding if it’s an option for you.
Proprietary reverse mortgage
This reverse mortgage is similar to the HECM, with two major differences, the second of which may not apply to most people seeking a reverse mortgage:
- The reverse mortgage is backed by private lenders (not the federal government).
- It’s generally reserved for more expensive homes (appraisal value of around $1 million and up).
This reverse mortgage has similar payments to the HECM, and the lower the remaining balance of your existing mortgage, the more you can borrow.
Single-purpose reverse mortgage
This reverse mortgage is the least common of the three, in part because it comes with the most restrictions and, as a result, doesn’t fit most people’s needs. Unlike the HECM, it’s offered by local organizations such as nonprofits or local governments. Terms for these reverse mortgages include:
- Tends to be the least expensive option (lower/fewer fees, interest charges, etc.).
- Proceeds are heavily restricted (must be used for a single, lender-approved purpose such as home repairs or paying off outstanding property taxes).
- Repayment isn’t due until the owner sells, moves out, or passes away. Also comes due immediately if the property is condemned by the city.
The Downsides of a Reverse Mortgage
While staying in your own home might seem like the best option—and it can be for many people—reverse mortgages have downsides. One of the main issues is that reverse mortgages can be costly, with relatively high interest rates and fees for closing costs, insurance, and servicing. All of these costs come out of the loan, leaving you with a smaller lump sum to live on. And while it’s possible to repay the loan and keep the home, it’s more likely that the home will end up being sold. If it’s important that your home stay in your family, a reverse mortgage may not be the right option.
However, if you need funds to support you through retirement, a reverse mortgage may be a viable solution. Learn more about the pros and cons of a reverse mortgage for your specific situation before making a decision. Be sure to understand the terms for non-borrower spouses.
Scams to Consider
Watch out for people who pressure you to take a reverse mortgage with some kind of empty promise. Here’s what you shouldn’t be doing with the funds:
- Paying for anything other than daily living expenses. Be alert to someone trying to talk you into a reverse mortgage to flip a home, use for home repairs, or purchase an insurance product.
- Repaying unsecured debt , like credit card balances, or using it to avoid foreclosure.
- Helping family members with their own financial woes.
Taking out a reverse mortgage is a major decision, and it’s important to review all your other options first. There may be other ways to reduce your expenses (downsizing to a smaller home, for example), or increase your income (picking up part-time work, etc.). If you’re struggling to pay bills, start with a free credit counseling session from MMI to see what resources are available to you.