Chapter 4: Reverse Mortgages

Many seniors find themselves with limited incomes but a significant amount of equity in their homes. A reverse mortgage is a tool that allows you to take the equity out of your house without having to sell it or make payments. Like the name implies, a reverse mortgage is the reverse of a traditional mortgage. With a traditional mortgage, you make payments on your loan to the lender each month, increasing your equity and decreasing your debt. Eventually, if you stay in the home, you will own it free and clear. With a reverse mortgage, the lender pays you instead, reducing your equity and increasing your debt (since the money is a loan against your home’s equity). You do not have to pay back the mortgage for as long as you live in the property.

There are several types of reverse mortgages:

• Single-purpose reverse mortgages are offered by some government and non-profit organizations to low or moderate-income seniors. Though borrowing costs tend to be inexpensive, availability is limited, and the cash can only be used for a specific purpose, such as home improvements, repairs, or property taxes.
• Home Equity Conversion Mortgages (HECMs) are widely available loans that are backed by the Department of Housing and Urban Development (HUD). There are no income restrictions, and you can use the money for whatever you like. To get a HECM, you must have no mortgage, or the majority of the existing mortgage must be paid. The amount of money you can borrow depends on your age, your home’s value, where your home is located, and current interest rates.
• Proprietary reverse mortgages are private loans and are typically the most costly option. They may be appropriate if your home’s value is very high, since they can give bigger cash advances than HECMs. The money can be used for any purpose, and there are no income limits.

The basic requirements to qualify for a reverse mortgage are:

• Everyone on the title of the home must be at least 62 (for most programs).
• You must live in the home.
• There must be equity in the home.

While a reverse mortgage can increase your cash flow, there are a few downsides to consider:

• The loans are usually costly. Origination fees, closing costs, and servicing fees can be high, and you will be charged interest on the outstanding balance.
• Most have variable interest rates. If the rate rises, the loan becomes more expensive.
• Your total debt increases rather than decreases over time.
• Since you are using some or all of your home’s equity, your heirs may inherit property with a large outstanding mortgage.