Know Your Rights: Reverse Mortgages
Posted on: March 6, 2023
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If you own your home and are 62 or older, a reverse mortgage loan could help you with significant bills, renovation costs, and other living expenses.
If you are interested in one, please take your time to review and fully understand it. This may not work for everyone. You should also discuss this decision with your family and your heirs, usually your children.
Is a reverse mortgage different than a regular mortgage on my home?
Yes, it differs from other mortgages, but it is also similar. Like other mortgages, it allows homeowners to borrow money using their home as security for the loan. The title stays in your name, but your property will have a loan against it.
Like other mortgages, you could lose the home to foreclosure if you fail to pay for required items such as property taxes and insurance (homeowners or flood).
But unlike other mortgages, you do not make monthly mortgage payments to the lender. The loan gets repaid when you no longer live in the home, usually after your death or sooner, if you sell the property. If one spouse dies, the repayment usually occurs after the second spouse dies. But certain papers may have to be completed promptly when the first spouse dies.
Because interest and fees are charged to the loan each month, the amount owed on the home grows over time. As the amount you owe grows, the amount of equity (what you can get by selling the house) goes down. This is unlike most mortgages, where the amount owed goes down because you pay each month.
A reverse mortgage loan is NOT free money. It is a loan on your house. If you want to fully own the house, you will have to pay back the entire loan amount, including the interest that has been charged.
If your heirs want the house, they will have to pay off all that is owed, including the interest charged over time. Most reverse mortgages give them a year to pay the amount.
NOTE: Most of this information only applies to Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage loans.
What are the requirements for a reverse mortgage?
In addition to being at least 62 years old, there are a few other requirements:
- You need to own the home outright or have paid down a considerable amount of the mortgage, i.e., have a lot of equity in the home.
- You have to live in the house as your primary residence.
- Your home must be in good shape. If not, the lender will tell you what repairs need to be made before you can get a reverse mortgage.
- You can’t be behind on any federal debt.
- You must pass a credit check and other eligibility requirements for the loan.
- You must stay current on your property taxes, insurance, and any homeowners association fees for the whole life of the loan. If you get behind on these, the lender can foreclose, and you will lose your home. In most foreclosures, people do not get any money back from the home’s value.
Only one spouse needs to be 62 years old to qualify.
What are the pros and cons of a reverse mortgage?
Reverse Mortgage Pros:
- If you don’t have a lot of savings or investments but do have much equity built up in your home, a reverse mortgage will allow you to get money that you can use to cover expenses in your retirement.
- Instead of selling your home to get cash out, you can keep the house and still get cash out of it. This means you don’t have to worry about potentially downsizing or getting priced out of your neighborhood if you have to sell and move. But this only works if you can keep up with property taxes and insurance costs.
- You can use the money from a reverse mortgage to pay off an existing home loan. This could free up money to pay other monthly expenses since you no longer have to pay that loan’s monthly note.
- The money you get from a reverse mortgage is considered a loan rather than income and will not be taxed by the IRS.
Reverse Mortgage Cons:
- You MUST live in the house and pay all property taxes, insurance, and other costs like you would with a traditional mortgage.
- If you become delinquent on these expenses during the reverse mortgage period or spend most of the year living outside the property, you could lose your home to foreclosure.
- When you die, your heirs will be required to pay the full loan balance or 95% of the home’s appraised value, whichever is less, to keep the house. If they do not, they will have to sell the house or turn it over to the lender to satisfy the debt. If you want your children or heirs to inherit your home, a reverse mortgage is something you should NOT do.
- A reverse mortgage eats away at your home’s equity.
- If you have money from the reverse mortgage put into a savings account or give it away, this could make you ineligible for need-based government programs like SNAP, Medicaid, or Supplemental Security Income (SSI).
- There are a lot of rules and details to reverse mortgages. The risks may not be worth the extra cash. You should NOT enter any reverse mortgage offer unless you understand the terms well.
Are there any other ways to get cash instead of a reverse mortgage?
Before taking out a reverse mortgage, make sure you understand this type of loan. You may want to look at other borrowing and housing options, such as:
- A home equity loan (HEL) or a home equity line of credit (HELOC) might be a cheaper way to borrow cash against your home’s equity. However, these loans carry their risks and usually have monthly payments. Qualifying for these loans also depends on your income and credit. You can learn more about these loans here: https://www.consumerfinance.gov/ask-cfpb/what-is-a-home-equity-loan-en-106/ and here: https://www.consumerfinance.gov/ask-cfpb/my-lender-offered-me-a-home-equity-line-of-credit-heloc-what-is-a-heloc-en-246/
- Depending on interest rates, refinancing your current mortgage with a new traditional mortgage could lower your monthly mortgage payments. Pay attention to the length of time you’ll have to repay your new mortgage, as it can affect your retirement plans. For example, taking on a new 30-year mortgage when nearing retirement could become a hardship later. Consider choosing a shorter-term mortgage, such as a 10- or 15-year loan. More info on refinancing a mortgage is here: https://files.consumerfinance.gov/f/documents/cfpb_should_i_refinance_handout.pdf
- Consider selling your home and downsizing and buying a more affordable home. This could reduce your overall monthly living expenses.
- There are state and local programs that may help with utilities and fuel payments as well as home repairs. Some localities also have programs to help with property taxes: check with your parish tax office.
Other resources can be found here:
https://www.consumerfinance.gov/consumer-tools/reverse-mortgages/
https://www.aarp.org/money/credit-loans-debt/reverse_mortgages/