Reverse mortgages have a bit of an identity crisis. Many years ago, some unscrupulous lenders used them for nefarious purposes. That has all changed. Highly regulated now, reverse mortgages can actually be a wonderful solution in certain financial situations. There are several different types, so be sure to consult someone at your bank who specializes in them. And remember, there are other financial options that might be more appropriate for your situation, for example, a Home Equity Line of Credit.
Following are answers to frequently asked questions about reverse mortgages.
Q: What is a reverse mortgage?
A: A reverse mortgage is different from a traditional loan in that it operates exactly in reverse. The traditional loan is a falling debt, rising equity loan, while the reverse mortgage is a falling equity, rising debt loan.
In other words, as you make payments on a traditional loan, the amount you owe is reduced and therefore the equity you have in the property increases over time.
With a reverse mortgage, you make no regular payments, so as you draw out funds and as interest accrues on the loan, the balance grows and your equity in the property becomes smaller.
Q: Who is eligible for a reverse mortgage?
A: You must own your home (or condo/townhome) as your primary residence, and one of the owners must be over age 62. You also must have some income to cover certain home expenses, but typically Social Security or pension funds are sufficient.
Q: Who is an ideal candidate for a reverse mortgage?
A: Those who owe very little on their house but need extra cash, or those who are not so concerned with leaving equity for their heirs.
Q: What if I already have a mortgage or a home equity line on my house?
A: You may still qualify for a reverse mortgage, but typically, other loans must be paid off on the house by the reverse mortgage, and then you get to keep whatever is left.
Q: How much can I borrow?
A: There is a formula determined by your age, appraised value and equity of your house, and your income. For rough numbers, $765,600 is the new 2020 limit for HECM loans (one type of reverse mortgage). Funds can be taken either as a lump sum, in preset installments or as a line of
Q: What can I use the money for?
A: There are typically no restrictions on what you can use the funds for.
Q: What are the costs and interest rates?
A: There are up-front costs associated with a reverse mortgage that can be higher than a traditional loan. The interest rates tend to be a bit higher than a regular mortgage, but in comparison to years past, they are still very low.
Q: How long can I stay in my house?
A: The reverse mortgage must be paid off when the last surviving borrower passes, or if the house is sold. But you cannot be forced to leave your home.
Q: How do I know if a reverse mortgage is right for me?
A: Call your bank and talk with a reverse mortgage specialist. If they don’t have one, call me and I will connect you with someone. You will be given a full set of costs and disclosures and actually go through an independent third-party financial counseling session to make sure you understand what you are getting and all the costs, etc.