A "reverse mortgage" allows people who are 62 and older to draw upon their home equity in order to receive a lump sum of money, a line of credit, or monthly income (or a combination of these), without having to pay back the loan until they die, move, sell the home, or breach the loan agreement. But is a reverse mortgage a good idea?
Read on to get the lowdown on reverse mortgages including what they are, how they work, how much money you can get, as well as the upsides and downsides.
The most common type of reverse mortgage is called a Home Equity Conversion Mortgage (HECM). HECMs are FHA-insured, which means the insurance comes into play if the loan is accelerated (called due) for one of the reasons listed below and the house isn't worth enough to pay back the lender in full through a foreclosure sale. In those cases, the FHA will compensate the lender for the loss.
In a regular "forward" mortgage, the borrower gets a lump sum of money from the lender, and then makes monthly payments towards repaying the money, including interest. In a reverse mortgage, rather than getting a lump sum that has to be steadily paid back, the homeowner typically receives periodic payments from the lender, which become the loan. Though, the lender's payments to the borrower may be in the form of a lump sum (subject to some limitations), monthly payments, or a line of credit you can draw on as needed. You can also get a combination of monthly installments and a line of credit.
The loan doesn't have to be repaid until:
After any of these occurrences, the lender may accelerate the loan and then the loan must be repaid plus interest and fees. Otherwise, the lender will foreclose.
Reverse mortgages are generally available to any homeowner over the age of 62 who has substantial equity in the home. Reverse mortgages generally don't require a credit or income test. However, they do require financial counseling from a HUD-approved HECM counselor.
To get a reverse mortgage, you also have to:
The amount you can borrow is based on your home's value, current interest rates, and your age. Also, there are limits to how much of your home's value you can draw out.
As of January 2018, the most money available with a HECM $679,650. Also, a borrower may get only 60% of the loan at closing or in the first year, subject to a few exceptions.
Reverse mortgages are sometimes worthwhile for retirees whose incomes are low but whose houses are valuable. But for most people, a reverse mortgage is a bad idea.
Reverse mortgages have significant downsides:
It's recommended that you proceed cautiously if you're considering taking out a reverse mortgage. Reverse mortgages are very complicated. HECM counselors have reported that it often takes at least a couple of hours to explain how these mortgages work and cover all of the topics—including costs and consequences—that borrowers need to understand before taking out this kind of loan.
Even after a HECM counseling session, many borrowers still don’t fully understand all of the reverse mortgage terms and requirements. If you go through a HECM counseling session, but feel you need more information, consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer. If you’re concerned about a reverse mortgage foreclosure, consider talking to a foreclosure lawyer in your state.
Also, be sure to watch out for reverse mortgage scams.