Amelia Granger is a writer and personal finance analyst for NerdWallet.com.
Over the last few years, reverse mortgages have become increasingly common. And some companies are aggressively marketing them even to people that wouldn’t be well-served by one. So if you’ve ever wondered, “should I do a reverse mortgage?” just keep reading to get the information you need to make a good decision.
Making the decision to get a reverse mortgage shouldn’t be taken lightly. Plenty of senior citizens have gotten into this specialized mortgage product without fully understanding the costs, fees and features, and have ended up losing out. But at the same time, these loans are common, and some seniors have used them effectively. As any retiree knows, money can be tight, and a reverse mortgage can be preferable to other options, especially if the alternative is going further into debt.
So to help you start to figure out if a reverse mortgage is right for you, here are some questions to ask yourself:
How does a reverse mortgage work?
A reverse mortgage is very different from the type of loan you might have used to buy your house—it actually bears more resemblance to a home equity loan than to what you might think of as a traditional mortgage. A reverse mortgage allows an older person to borrow against the value of their home. So the borrower gets a certain amount up front, and then after the home is sold or otherwise vacated, that amount is due to the lender. This can be paid off by the sale of the home—sometimes by the heirs buying the house back—but if the balance owed equals more than the house is worth, that difference must be paid by the borrower (or their estate, if they have passed away).
If you get a federally insured Home Equity Conversion Mortgage (HECM) and you repay the loan via a sale of the home, then you are legally protected from owing more than the home is worth, because the federal government will absorb the difference. But if the HECM is repaid with funds other than from the sale of the home, the borrower (or their estate) is responsible for repaying the balance.
This is just a brief overview. Sound complex? It is. Again, if you’re wondering if you should do a reverse mortgage be sure to approach these loans with caution, and never take one out without professional guidance.
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Do I qualify for a reverse mortgage?
To qualify for a reverse mortgage you must be at least 62 years old. You must own the property outright, or have a small enough outstanding mortgage balance that it will be easily repaid by the proceeds of a reverse mortgage. You must not be delinquent on other debt, and the property you’re trying to mortgage must be either a single-family home, or certain types of 1-4 family homes and condominiums that meet Federal Housing Authority/Department of Housing and Urban Development requirements. Check with reverse mortgage counselors for full details. Local reverse mortgage counselors can be located through HUD.
What are the risks of a reverse mortgage?
There are plenty of risks — this resource from AARP does a good job enumerating them. To start with, be sure you carefully consider the fees involved. For a 75 year-old HECM borrower living in a $250,000 home, the AARP calculates the total loan costs after 12 years will be $136,029. That takes into account monthly fees, mortgage insurance premiums, interest charges and servicing fees. Also remember to consider how your decision will affect your heirs. With a reverse mortgage, the diminishing value of your home and the repayment due from your estate will decrease the amount you will be able to leave to your heirs.
So if you’ve been asking yourself “should I do a reverse mortgage?” think through the costs and benefits of a reverse mortgage carefully. And remember to not believe everything you read or hear — reverse mortgage lenders often put a lot of effort into convincing borrowers that these loans are the solution to all their problems. Check your sources of information as you do your research. Before you enter into a reverse mortgage, consider alternative loan products or income assistance programs that may be available in your area, and always consult an unbiased professional.
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