Understanding the Risks of a Reverse Mortgage

A reverse mortgage may be an excellent option for many seniors looking for a little more financial freedom. A reverse mortgage is essentially the opposite of a forward mortgage in which you make payments to purchase a home. Instead, a reverse mortgage allows you to receive payments using the equity in your home. 

The loan balance is due upon the borrower’s death, or if they no longer live in the home as their primary residence whether through relocation or sale. 

Unfortunately, due to some untrustworthy lenders that have taken advantage of seniors, reverse mortgages have sometimes been touted as too chancy. As is the case with any loan, it’s important to understand the risks of borrowing. Here are the truths about applying for a reverse mortgage and how it could benefit your financial future. 

Quick facts about a reverse mortgage:

• It may appear as a home equity line of credit (HELOC)
• You can get a lump sum payment, monthly installments or a line of credit depending on how much of your house you’ve paid down and it’s market value
• You keep 100% ownership of your house
• The loan debt should not exceed the home’s worth
• You will not have to pay back the loan while living in the house 
• It’s the only option for seniors who don’t wish to make monthly payments and are not eligible for a home equity loan or remortgaging
• The amount lenders can charge for mortgage insurance premiums and loan fees is federally regulated

What are the reverse mortgage requirements?

While lack of income or credit score restrictions are not relevant, there are still guidelines to be eligible for a reverse mortgage. You must:

• Be 62 years or older
• Stay current on homeowner’s insurance, HOA dues and property taxes
• Own your property or own at least 50% equity
• Look after insurance premiums and loan fees 

Additionally, the U.S. Department of Housing and Urban Development requires all prospective reverse mortgage borrowers undergo an approved counseling session.

What to consider when applying for a reverse mortgage?

The homeowner and their families should consider the following when applying for a reverse mortgage:

1. Whether you plan to remain in the house or pass it on to family members
2. The plans for dependents and other household members
3. The different financing options available 
4. Pay attention to fees, most of which are paid up front 
5. Interest on a reverse mortgage cannot be deducted from your taxes. However, if you pay off the loan in full, you can deduct the total interest

Reverse mortgage pay-outs

There are first-year limits to encourage borrowers to save money. While a single lump-sum payment is an option, it may be ill-advised or even risky depending on the borrower’s financial situation. Instead, consider opting for monthly payments or a line of credit which offer more long-term security. 

Protection for non-borrowers who live in the home

Many people assume that once the borrower dies the spouse will have to move out. That is untrue. A non-borrowing spouse can continue to live in the house but will not receive reverse mortgage payments after their partner dies. This is a big financial decision, so it’s important to take your time when deciding whether to opt for a reverse mortgage. That said, as long as the spouse continues to meet the criteria below, this non-borrowing spouse would not have to leave the home and be able to defer the timeline for when the loan becomes due and payable.

1. The non-borrowing spouse was married to the borrowing spouse at the time the loan was closed, and they remained married for the duration of the borrowing spouse’s life.
2. The non-borrowing spouse was disclosed as such in the Home Equity Conversion Mortgage (HECM) documents
3. Have occupied, and continue to occupy, the property securing the HECM as the principal residence of the non-borrowing spouse

Borrowing together often makes sense for couples considering a reverse mortgage if they’re both 55 years or older. This allows the surviving spouse to keep monthly payments or the line of credit and stay in the house. 

Refinancing a reverse mortgage is another option to add a younger spouse that didn’t meet the age requirements when you first applied. 

What happens when we wish to sell or are no longer living in the home?

After one year the loan must be repaid, even if you’re living in a long-term care facility. Typically this is done by selling the home. 

Lenders must offer heirs a period of time to decide if they wish to repay the reverse mortgage and keep the home; if they wish to have the lender sell the home; or if they wish to sell it themselves to pay back the loan. This is often set at 30 days. Though it is possible to extend the deadline, it’s smart for any heirs to have decided on their plans for repayment ahead of time. 

Additionally, you can pay off your reverse mortgage ahead of time without any prepayment penalty.

Finding the right reverse mortgage for you

While there are a lot of misconceptions about reverse mortgages, it is important to weigh the risks and rates when considering any loan. To make sure it’s the right fit for you, our experts at Equity Access Group are here to answer any questions you may have.