Reverse Mortgages: What You Need to Know

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November 19, 2014 | By RGR Marketing Blog

Defining the Reverse Mortgage: What Is It?

Only available to senior citizens who are sixty-two years of age or older, a reverse mortgage is a type of loan that allows a homeowner to convert equity they’ve built up in their home into cash for use elsewhere. Because retirees often find themselves living on a fixed income, the reverse mortgage was created as a way to open up a new income channel based on the wealth they’d essentially accumulated in their home’s value.

With the extra cash that seniors have been able to draw out of their homes with the reverse mortgage, costly living expenses such as health care become that much easier to manage. As an added bonus with certain types of reverse mortgages (or potential drawback, depending on how financially conservative or responsible a person is), there is no restriction on how the money can be used once it’s drawn out of the home.

How the Reverse Mortgage Was Named

So how did the reverse mortgage earn its name? In essence, the lender is actually making payments to the borrower with a reverse mortgage, fundamentally reversing the typical mortgage payback mechanism (where a homeowner would make payments each month to the financial institution that held their mortgage).

Making the proposition infinitely more attractive to seniors who are in a cash crunch, a reverse mortgage does not require the senior to pay back the loan until the home is vacated through a home sale, or after the senior has passed away. The only stipulation in terms of monthly or annual payments is that the homeowner continues to stay current on their property taxes, HOA fees if they exist, and homeowners insurance, as well.

Benefits and Risks of Reverse Mortgages

According to the AARP, in the two decades between 1990 and 2010, as many as 660,000 reverse mortgages were issued. But financial experts argue that the potential for abuse is significant in the industry, and the risks are something worth taking a deeper look at. Of the various types of reverse mortgages, Home Equity Conversion Mortgage (HECMs) may be the safest, due to the fact that they are insured by the federal government (specifically the Federal Housing Administration), and offer a few protections to the borrower. Because the lender gets paid back from the reverse mortgage when the home sells, should the home get sold for less than the amount of the loan, the FHA covers the difference.

Reverse mortgages may offer a boon to struggling seniors, but they can be expensive. Experts look at an “ideal candidate” and paint the picture of a senior aged eighty-five, with well under a thousand dollars a month in income and a house that’s valued at half a million dollars. When there’s no other source of income and the bills are piling up, the reverse mortgage provides much-needed cash that otherwise would not exist. For seniors who can afford to make payments on their existing mortgage, in addition to having other financial assets on hand, the reverse mortgage might not represent such a wise idea.

In terms of the risks or downside of reverse mortgages, let’s start with the fees, which can run as high as 5% of the home’s value (according to more aggressive estimates in the industry). Origination fees, service fees, closing fees – they can all add up quickly. With origination fees on federally insured loans pegged at 2% of the first $200,000 of the home’s value (as well as an additional 1% of the remaining amount, capped at a total of $6,000), it becomes clear that the amount of money to be gained from a reverse mortgage can be greatly diminished as a result of costly fees.

The amount of money that a senior can borrow against their home is limited by the FHA for HECMs as well, with a cap set at $625,500. When the home value is lower than that amount, borrowers are only given access to a percentage of the appraisal value of the home. Because the senior borrower has to be living in the home, the reverse mortgage option is also not a good one if there are plans to move or to relocate to a hospice care facility, for example.

Make Sure to Speak With a Qualified Mortgage Professional

Because there are risks involved, and because the reverse mortgage is not an ideal solution for every potential borrower’s problems, it is wise to seek counsel from a trusted mortgage professional. Reverse mortgages are not the only option for seniors looking to augment cash flow during their later years, and a financial services counselor will be able to provide you with more information, while steering you clear of trouble.

[Photo Credit: CBC.ca]

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Defining the Reverse Mortgage: What Is It?

How the Reverse Mortgage Was Named

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Make Sure to Speak With a Qualified Mortgage Professional

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Make Sure to Speak With a Qualified Mortgage Professional

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