The idea of a reverse mortgage certainly sounds good: a person who is 62 or older is able to borrow against their home's equity in a legal arrangement that lets them tap cash for retirement or vacations without having to sell (or vacate) the family home.
But is it too good to be true?
"A reverse mortgage loan can help some older homeowners meet financial needs, but can also jeopardize their retirement if not used carefully," according to Debt.org, a debt consolidation and advice provider.
In the past couple of years, the popularity of reverse mortgages has soared, though they still only account for 1 percent of the $11.5 trillion in U.S. mortgages.
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After a plummet in reverse mortgages following the recession of 2008, "the past few years have seen a turnaround," according to Debt.org staff writer Bill Fay. "The number of eligible applicants – people over 62 – is expected to go from 46 million now to 98 million in 2060."
Fay said that the booming senior population (not to mention the television and print ads featuring Baby Boomer favorite Tom Selleck of Magnum P.I. and Blue Bloods fame) have helped make reverse mortgages popular again.
But Fay cautioned those who are old enough for a reverse mortgage not to base their whole decision on talk from Tom Selleck, who assures viewers, "It's not another way for banks to get your house, and it's also not too good to be true."
That's easy for Selleck to say: the “Magnum P.I.” star has an estimated net worth of $45 million. "The industry is steeped in promises, controversy and cautionary tales," Fay warned. "If you're considering getting a reverse mortgage, the best way to ensure a happy story is to educate yourself."
Here are a few things Debt.org and other retirement and real estate experts want you to know about reverse mortgages:
How a reverse mortgage works
According to U.S. News, a reverse mortgage lets you borrow against your home's equity so you receive cash without selling your home. This money can be paid in a lump sum, regular payments staggered over time or via a line of credit that allows you to take out money as needed. The key factor that appeals to so many people, according to U.S. News, is that "you do not need to pay back your reverse mortgage as long as you continue to live in your home, and you do not have to make any payments on the loan." Be warned, however, that "you will need to keep up with other housing costs like property taxes, homeowners insurance, repairs and association dues."
When the loans come due
The short answer: when you die. "Your heirs can pay off the loan balance if they want to keep the property or they can let the lender keep the property to settle the debt," U.S. News explained. If you move out of the home or start living somewhere else as your primary residence, you must repay the loan, ordinarily by selling the home. "The lender considers that you changed your residence if you live outside your property for more than six months in a year for nonmedical reasons or 12 consecutive months for medical reasons."
The types of reverse mortgages
Home Equity Conversion Mortgages (HECM) are the most common type, offering federal backing, limits on some fees and the ability for the borrower to spend their loan moneys however they want. HECMs do restrict eligibility and limit borrowing to the FHA maximum loan limit, which was $679,650 in 2018. Proprietary Reverse Mortgages are similar, but they have fewer restrictions and no government guarantee. Single-Purpose Reverse Mortgages involve the lender restricting how you can use the money from the reverse mortgage and tend to be the least expensive. They are offered by some state and local governments and nonprofits, and are typically only available for low- and moderate-income borrowers, according to U.S. News.
Who is a good candidate for a reverse mortgage:
"If you own your home and don't have much savings or need an infusion of cash, a reverse mortgage has some advantages," Fay explained. The most notable is its ability to ease the strain on your monthly budget, especially when you need it to supplement Social Security or help handle mounting medical expenses.
Who is not a good candidate for a reverse mortgage:
"A reverse mortgage is a questionable proposition if you have sufficient income to pay your bills or are willing to sell your home to tap into the equity," Fay said. "If that's the case, it may make more sense to just sell it and downsize your home." And because reverse mortgages can be expensive loans, it may make more sense to weather a temporary shortfall than take on a costly debt. "A reverse mortgage is also not a great idea if you want to leave your home to your heirs," Fay added. "They can still inherit the home, but they'd have to pay a mortgage debt that has been mounting instead of dwindling."
Who is a terrible candidate for a reverse mortgage
That, according to Fay, would be anyone who blindly believes everything they see, read or hear on advertisements for reverse mortgages. The Consumer Financial Protection Bureau (CFPB) fined three companies in the reverse mortgage industry a total of $790,000 in 2016 for alleged false claims.