Reverse mortgages are notoriously known for scammers and unscrupulous loan officers who target older individuals and persuade them to use their equity in the home to borrow money. However, some legitimate scenarios exist when reverse mortgages make sense for older homeowners.
This article discusses reverse mortgage pros and cons and whether or not you or your family should consider a reverse mortgage.
What Is a Reverse Mortgage?
By now, you’re familiar with how a traditional mortgage works—you provide a down payment, a bank lends you money to buy a home, then you pay them back a little each month. In a reverse mortgage, this process is…well, reversed. Instead of paying a mortgage servicer, you receive income every month.
With a reverse mortgage, you continue to live in the home and do not have to pay off the loan until you either move out of the home or pass away. This often leaves the surviving spouse and heirs responsible for paying back the reverse mortgage upon their death—which results in selling the house in most cases.
Because a reverse mortgage is a type of loan, it does come with an interest rate (i.e. the amount you will have to pay back goes up, not down) as well as mortgage insurance premiums. Like your traditional mortgage, interest on a reverse mortgage accrues monthly.
Who Are Reverse Mortgages Meant For?
Reverse mortgages are only available to borrowers 62 and older. Most borrowers who take out reverse mortgages have paid off their homes and are interested in using that equity to qualify for a loan that pays them each month to cover their expenses as they age.
If staying in your home with no monthly mortgage payment sounds tempting, understand that reverse mortgages aren’t free. The money borrowed through the reverse mortgage must be paid back to the lender when the home is sold or the borrower dies.
How Does a Reverse Mortgage Work?
The most common type of reverse mortgage are home equity conversion mortgages (HECM), and this is the type of reverse mortgage you’ll most likely be dealing with.
To qualify for a reverse mortgage, lenders establish a principal limit. The principal limitation is the amount of equity that the borrower can use to qualify for the reverse mortgage. It’s usually determined by the home’s value, current interest rates, HECM mortgage limits, and the borrower’s age.
The best way to understand how reverse mortgages work is to think of them as a cash advance on the home’s future sale. The lender is willing to pay you monthly cash installments and requires it to be paid back at a later date when the home is sold.
While reverse mortgages pay the borrower instead of the other way around, borrowers are still responsible for paying their homeowners insurance and property taxes in addition to the general upkeep of the property. Failure to do so may cause the home to go into foreclosure or have your lender call the loan and demand immediate payment for the entire loan amount.
How to Qualify For a Reverse Mortgage
In addition to being 62 years or older, there are several other requirements for reverse mortgages, including:
- The borrower must own the property in full or have a substantial amount of equity in the home.
- The borrower must not be delinquent on federal debt.
- The subject property must be the borrower’s primary residence.
- The borrower must have the ability to make their homeowners insurance and property tax payments.
- The borrower must attend an information session from the Department of Housing and Urban Development (HUD) and meet with a HUD-approved counselor.
Before you take any further steps, however, it’s important to consider the pros and cons of reverse mortgages so you can be sure you are making the right decision. In the next section, we’ll go over reverse mortgage pros and cons to help you decide if this process is right for you.
Reverse Mortgage: Pros and Cons
Before you can decide whether a reverse mortgage is right for you, it’s important to do your research. What may be a good financial decision for a friend or neighbor may end up being a bad financial decision for you.
To help you compare the two, let’s examine the pros and cons of a reverse mortgage.
Reverse Mortgage Pros
There’s no denying that reverse mortgages have benefits for older individuals. Below are some of the most common benefits you’ll get if you decide that a reverse mortgage is right for you:
- Regular monthly income – Seniors who receive social security only receive about $1,540 per month on average. Those that have monthly expenses for home care, medical procedures, and prescription medicine may find that they require additional income to cover these essential needs.
- No monthly payment – Instead of decreasing your loan balance over time with monthly mortgage payments, reverse mortgages increase your loan balance. However, they don’t require borrowers to make any payments as long as they live in the house.
- An enjoyable retirement – Older individuals in retirement want to enjoy their golden years without worrying about where their money comes from. Reverse mortgages provide income that enables seniors to enjoy their retirement.
Reverse Mortgage Cons
What is the downside of a reverse mortgage? While reverse mortgages have a few benefits, the cons can outweigh the advantages. Most borrowers will find that reverse mortgages aren’t right for them. Below are some of the cons of reverse mortgages:
- The balance must be paid back – The biggest con of reverse mortgages is that all the money given to the borrower while in the home must be paid back to the lender. This often leaves a significant burden for the surviving heirs once the homeowner dies.
- Borrowers must still pay property taxes and homeowners insurance – While you may think a reverse mortgage means no monthly payment, borrowers are still required to pay property taxes and homeowners insurance.
- Reverse mortgage fees and closing costs can be high – Although a reverse mortgage pays the borrower in monthly installments, this type of loan still comes with origination fees and other closing costs that you must factor in before taking out a reverse mortgage.
Alternatives to Qualify For a Reverse Mortgage
If the reverse mortgage pros are outweighed by the cons, this doesn’t mean you’re out of options.
For one, you may consider selling your home and downsizing to reduce your current mortgage amount (provided you haven’t paid off your existing mortgage). If you are able to sell your home for more than you owe, you could have leftover cash, a place to live, and equity in another home.
Another option is to refinance your home. If interest rates are lower than the one you’re currently paying, this can reduce your monthly payments without having to go through the hassle of moving.
Taking out a home equity line of credit is another option that is similar to a reverse mortgage but with different qualifications. However, since you will still be responsible for paying back the full amount of the loan, this is not always preferable to a reverse mortgage.
Are Reverse Mortgages a Scam?
No; in and of themselves, reverse mortgages aren’t a scam. However, they got a bad name due to the number of scams that contributed to the financial crisis of 2008.
These scams involved telemarketers calling older homeowners and persuading them of the benefits they’ll receive from taking out a reverse mortgage. Some scammers deliberately failed to disclose key stipulations on repayment terms—including that once the borrower dies, the family is responsible for paying the loan back to the lender.
Today, scammers are getting much more creative. However, there still exist some common scams you can recognize if you think you or your family members may be targeted by a reverse mortgage scam. Some common red flags to watch out for include being contacted with an unsolicited offer, being told a reverse mortgage is the solution to your financial problems, or if the person is being overly pushy.
Final Thoughts
While reverse mortgages aren’t for everyone, there are some benefits for seniors who need an extra monthly income to pay for basic life necessities or to live a comfortable retirement. However, the downsides of reverse mortgages and the stigma around them are often enough to deter most qualified homeowners.
If you have weighed reverse mortgage pros and cons and determined this is the right move for you, contact an FHA-approved reverse mortgage lender and work with a title company who has the necessary experience.
Reverse mortgages can’t be handled by just any title agency. At Leading Edge Title, we have the knowledge and experience to navigate the many requirements and details unique to reverse mortgages. We are large enough to handle closings of any size, but small enough that you will never feel like a number.
With a dedicated team of Closers and Processors, we are ready and willing to work for you!
