Reverse mortgages are often advertised as a popular way for seniors to access their home equity, which can be appealing to consumers looking for a quick source of money during troubled financial times like the COVID-19 pandemic. Homeowners should fully understand all costs and terms before applying for a reverse mortgage.
A reverse mortgage allows homeowners to convert some of a home’s equity into cash without having to sell the property. The cash can be paid out to you in installments or as a lump sum, so you usually don’t have to pay anything back if you live in your house.
Because of the appeal of these loans, seniors should be wary of charging excessive upfront fees for services that are generally free or available at very low cost through the Department of Housing and Urban Development (HUD).
Reverse mortgages can also come with some significant conditions. Consumers should understand that the amount they owe increases significantly over time as they defer repaying the reverse mortgage until they move out of their home or die. Interest is charged on the loan every day, so the reverse mortgage may grow to the value of the home. People taking out reverse mortgages remain responsible for property taxes, insurance, and maintenance costs.
Some advertisements say heirs can inherit the house, but keep in mind that to keep it, they will have to pay off the reverse mortgage loan along with possible fees and charges that can add up.
Those in need of cash might consider getting a lower-cost line of credit for home equity and considering programs to help defer or lower taxes and utility bills.
Tips to keep in mind before applying for a reverse mortgage:
• Know the basic requirements. To apply for a reverse mortgage, a senior must be 62 years or older and have home equity. The apartment must be the main residence and remain in good condition. A Home Equity Conversion Mortgage (HECM) is the only government-insured reverse mortgage, and the loan process cannot be initiated until the senior receives advice from a HECM advisor. Factors like your age, the type of product, the value of your home, and your debt on your home all add up to the amount you can borrow.
• Consult a HECM advisor. A HECM advisor will help answer questions about eligibility, financial impact, and other alternatives. The Fair Housing Association (FHA) does not recommend using services that charge a fee for referring a borrower to an FHA lender, as the FHA provides all information free of charge and HECM housing counselors provide free or low cost stand. A list of the approved advice centers can be found at http://entp.hud.gov/idapp/html/hecm_agency_look.cfm or call 800-569-4287.
• Include heirs in the decision. Since a reverse mortgage affects the borrower’s assets in the event of death, involving heirs avoids future misunderstandings.
• Make sure that a reverse mortgage fits your needs. Determine whether it is practical to keep the house long enough to make the reverse mortgage economical. Take into account future health care needs, as well as the safety and ease of use of the home.
• Take into account all of the costs associated with obtaining a reverse mortgage. Be prepared to pay some of the fees involved in processing a reverse mortgage loan, including an issuing fee, closing costs, a mortgage insurance premium, a service fee, and the interest rate.
• Understand the repayment terms. A reverse mortgage loan must be repaid in full if the owner dies or the home sells. Other conditions that affect loan repayment include non-payment of property taxes or hazard insurance, property deterioration, and permanent relocation of the borrower who has a new primary residence or who has not lived in the apartment for 12 consecutive months.
For a full list of requirements for reverse mortgages, please contact US Department of Housing and Urban Development.