Like most things, it depends…
A reverse mortgage provides income for people to tap into for their retirement.
One advantage of a reverse mortgage is that the borrower’s credit is not relevant because the borrower does not need to make payments. The home serves as collateral and must be sold to repay the mortgage when the borrower dies (in some cases, the heirs have the option of repaying the mortgage without selling the home).
One disadvantage is that these types of mortgages have large origination costs relative to other types of mortgages. The costs become part of the loan balance and accrue interest.
No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. After accounting for the initial mortgage amount, the rate at which interest accrues, the length of the loan and rate of home price appreciation, the transaction is structured so that the loan amount will not exceed the value of the home over the life of the loan.
Often, the lender requires that there be no other liens against the home. Any existing liens must be paid off with the proceeds of the reverse mortgage.
Do you qualify? To be eligible for a FHA HECM (home equity conversion mortgage), FHA requires that you be a homeowner 62 or older, own your home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan, and you must live in the home.
What’s the difference between a reverse mortgage and a home equity loan?
With a traditional HELOC (home equity line of credit), you must have sufficient income to debt ratio to qualify for the loan and you must make monthly payments. The reverse mortgage is different in that it pays you and is available regardless of your current income.
The amount you can borrow depends upon your age, the current interest rate and the appraised value of your home (or FHA’s mortgage limits for your area, whichever is less). Generally, the more valuable your home, the older you are and the lower the interest, the more you can borrow.
Even though the loan is not due as long as the house is your principal residence, you are still required to pay your real estate taxes, insurance and other conventional payments like utilities.
When you sell the home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees. The remaining equity in your home, if any, belongs to you or to your heirs.
How common are reverse mortgages? 335,000 federally insured reverse mortgages have been issued to seniors in the past 3 years. That’s more than the total from 1990-2006.
Even though reverse mortgages are becoming much more common, consumer advocates caution that reverse mortgages should be used only as a last resort because of the high fees and the increasing concern with fraud associated with these loans.
AARP recommends that senior citizen borrowers with good credit carefully analyze the options of a more traditional mortgage, such as a home equity loan, against a reverse mortgage.
How much cash might you get from your home?
Receive free information about reverse mortgages in general by calling AARP toll free at (800) 209-8085.
Contact the Housing Counseling Clearinghouse at (800) 569-4287 for the name and telephone number of a HUD-approved counseling agency and a list of FHA-approved lenders in your area.
Be sure to work with a pre-approved reputable lender when considering a reverse mortgage.