Reverse mortgages are one of those things that people have a preconceived notion of, probably a negative one.
But among the many misconceptions surrounding reverse mortgages, the most oft-repeated one is that they’re a scam to swindle vulnerable senior citizens out of their most valuable asset: their homes.
While it’s true that home-owning seniors have been beset by fraud schemes and outright theft, the reality is that, with adequate counseling, guidance, and planning, reverse mortgages can be beneficial to retirees.
This does not mean that reverse mortgages are for everybody, but under the right conditions, they can be a perfectly safe and financially sound strategy for seniors who own their homes and want to access extra cash.
WHAT IS A REVERSE MORTGAGE?
The most common type of reverse mortgage is known as a Home Equity Conversion Mortgage (HECM), a government-backed loan that converts your home equity into cash. You can receive a large sum all at once, establish a line of credit to draw on as you please, or get paid in monthly installments.
In the most recent revision of loan limits for reverse mortgages, the maximum loan amount was raised to $636,150. This loan can be used to pay off the balance left on your existing mortgage if any, and costs related to the loan itself, such as appraisal fees, origination fees, insurance premiums, and closing costs.
If you wish, you can pay back the reverse mortgage as you would any other loan. However, you could also elect to not pay it back. The loan only becomes due when you, the borrower, and any co-borrowing spouse pass away or leave the house.
As long as you remain on the property and fulfill a few basic obligations (such as completing repairs and maintenance on the home, and keeping up with property taxes, homeowners insurance, or any other applicable fees) you are not required to pay the loan off. And if you have chosen monthly disbursements, you could continue to collect those for the rest of your life.
When you pass on or leave the house, if you have no heirs (or your heirs do not wish to keep the house), the property is sold to pay off the loan. And if the loan balance is higher than the house’s worth, the U.S. Government actually covers it through the Federal Housing Administration (FHA).
That protection is due to a yearly insurance fee that is bundled into the reverse mortgage. Because of this fee, these types of reverse mortgages are federally insured. The FHA reimburses the lender if the house is “underwater” (when the loan balance is higher than the property’s current market value). However, if your heirs do wish to keep the house, they may have up to one year to pay off the loan balance in order to keep the house.
WHO QUALIFIES?
To qualify for a reverse mortgage, certain criteria must be met:
- Borrowers must be at least 62 years or older. Spouses that live in the house, and are also of age to qualify, can co-sign the loan. Spouses younger than 62 cannot be included in the reverse mortgage. However, they may maintain a residence in the property after the borrower has passed, if certain conditions are satisfied.
- Borrowers must own their home or have substantial equity available (at least 50%, but preferably more).
- The property must be the primary residence. Reverse mortgages will not apply to vacation homes or investment properties. It must be either a single-family home or a two-to-four unit home.
Additionally, borrowers need to comply with Department of Housing and Urban Development (HUD) specifications and have enough income to keep up with ongoing property costs, mainly insurance premiums, home maintenance fees, and property taxes.
HOW TO SAFEGUARD AGAINST FRAUD
Now that you know what a reverse mortgage is and what the qualification requirements are, you’re ready to decide if it’s the right move for you. But, as we previously mentioned, there are risks involved in undertaking this venture.
Up until a few years ago, the reverse mortgage market was rife with unscrupulous lenders looking to profit from uninformed customers. Although tougher regulations have curtailed such practices, it’s still something to look out for.
If you or an elderly family member are considering a reverse mortgage it is important to research the available lenders and become acquainted with the terms and conditions of their products. The FBI publishes tips on how to avoid falling for reverse mortgage scams, particularly by seeking out your own loan counselor and avoiding any unsolicited advertisements. At no point should you or a loved one sign any document if you don’t understand the information presented.
But even the best-laid plans go awry. Therefore, if you believe you or someone you know has been the victim of this type of fraud, you are encouraged to file a complaint with the FBI or through the HUD website. Doing so could help you recoup the money lost and prevent others from being scammed.
HOW TO AVOID A BAD DEAL
The risks associated with reverse mortgages go beyond being targeted by scammers. Many times our own unfamiliarity with real estate jargon or financial concepts can put a crimp in our ability to find the best possible deal.
First of all, you should know your needs:
- Is a reverse mortgage right for your specific situation?
- What do you need the money for?
- Do you have additional savings, assets, or investments?
Even though a lender cannot evict you from your home for not paying the reverse mortgage, and the FHA ensures that lender against potential losses, you still need to make sure you have enough money available to keep up with property taxes and insurance payments, not to mention home maintenance costs.
This can become an issue if you choose to receive a one-time payment of your reverse mortgage instead of smaller, monthly installments. Generally speaking, a reverse mortgage is taken for an express purpose.
If there is none and you suddenly receive a large amount of money, there’s a chance that it’s not going to be used wisely. Lump sums are susceptible to being spent without careful consideration, particularly if a sound financial strategy is not applied.
Nevertheless, even with clear intentions, a reverse mortgage can be an ill-advised decision if certain situations arise. For example, one of the conditions to qualify for the loan is that the home needs to function as a primary residence.
Therefore, if you’re thinking of relocating at some point in the foreseeable future, either to move into a smaller place or closer to another family member, a reverse mortgage might not be a good idea. Health problems (receiving long-term care or even a lengthy hospital stay) can also lead to abandoning your home and the possibility of foreclosure.
WHAT IT ALL MEANS
Reverse mortgages are not for everybody. Some homeowners are better equipped than others to handle the risks involved in taking out this type of loan.
Even if you meet the necessary qualifications, there may be more beneficial opportunities available to you.
Other mortgage refinancing options such as applying for a:
- home equity loan
- home equity line of credit (HELOC)
- cash-out refinancing
Could all serve as alternatives to a reverse mortgage.
Whichever of these choices best fits your needs, by researching several different lenders, their products, and their practices you should be able to prevent any deception or misunderstanding during this process.