Why All The Negativity Around Reverse Mortgages?

Reverse mortgages have their critics as well as supporters, but that hasn't stopped some people from turning to them for income as the economy has worsened and reverse mortgage rates have fallen. For example, the number of reverse mortgage loans through the FHA's Home Equity Conversion Mortgage (HECM) program jumped to 112,000 in 2008 from 76,000 in 2006.

Some people are very opposed to people using reverse mortgages to cash in the equity in their homes, while others believe they are a good tool for people who are having a tough time paying their bills or have a major financial difficulty. Take a look at some of the concerns about reverse mortgages and things to think about when considering them.

Why Use a Reverse Mortgage?

With a regular mortgage you make monthly payments to a lender. A reverse home loan allows you to borrow against the equity you have in your home and receive payments. The money won't have to be repaid until you move, sell, or die. To qualify you must:

  • Be 62 or older
  • Use the home as your primary residence
  • Get reverse mortgage counseling (HUD requirement for HECMs)
  • Own your home outright or have a mortgage balance small enough to be paid off by the proceeds.

The older you are and the higher your home's appraised value, the more money you'll qualify to receive, up to a maximum of $625,000. HECM rates are variable and move with financial markets.

Common Concerns

Some homeowners who are unable to sell their home because of the housing market's decline have found reverse mortgages to be a godsend. But as with any financial product, these loans aren't for everyone. Three common concerns about reverse mortgage loans are:

  1. Reverse mortgage brokers are running scams. There certainly are some dishonest mortgage brokers targeting senior citizens by preying on their fears about money and the economy. They may charge homeowners for information, use high-pressure sales tactics, or push them to buy other financial products they don't really need. However, many reforms have taken place in the industry. Lenders approved by HUD have been vetted by the agency, provide the required counseling and disclosures, and are forbidden from pushing products like annuities as part of a reverse mortgage pitch.
  2. A reverse mortgage lender will steal my home. Your mortgage lender won't be able to take your home away as long as you continue to live there and keep up with the property tax and insurance payments. You'll also need to keep up routine maintenance on your house. These loans are also structured so that you'll never owe more than the value of your home when you or your heirs go to sell it.
  3. A reverse mortgage will rob my children of their inheritance. Having a reverse mortgage does come with the risk that there won't be much equity left in the home after your death. However, your heirs will have the opportunity to pay off the balance of your loan and keep the house, or sell it to pay off the loan and keep any remaining equity. If the loan is underwritten by FHA and the lender sells the home for less than the balance due on the loan, the FHA will cover the shortfall and the entire debt will be retired. If you are counting on leaving your home to your kids, consult with an estate planner to determine if you're making the right decisions.

Benefits of Reverse Home Loans

Among the benefits of having a reverse home loan are that there will be no income or credit checks required to borrow. The money isn't taxable and won't usually affect your Social Security or Medicare payments. Other benefits include:

  1. Being able to wrap closing costs into the mortgage loan. Reverse mortgages come with heftier fees than traditional mortgages--so seniors who don't have the cash upfront may finance those costs in the loan. Among the fees for a reverse mortgage are loan origination costs, which are capped at a maximum of $6,000 for the HECM program, mortgage insurance premium, and appraisal fee.
  2. You can choose how to get paid. You can receive your money as a lump sum, through regular payments, a line of credit, or a combination of both. You also have the option of getting a line of credit that allows you to draw on it whenever you need cash. Usually you will be able to change how you get paid for a small fee.
  3. The money can be used however you choose. Many people who take out reverse home loans are looking for a way to supplement their income or pay for medical bills and long-term care costs. Others use the money they receive to downsize to a less expensive home or move closer to their children. And others are using the proceeds to top off their investment portfolios while stock prices are down--reversing their losses with a reverse mortgage.

More Money in Your Pocket

Choosing to get a reverse home loan is a big decision that will impact your financial future. But if used the right way, a reverse mortgage can increase your income stream and help you to stay financially independent longer. Among those who might benefit from a reverse mortgage are those who:

  • Are facing foreclosure or bankruptcy
  • Have ongoing medical bills that aren't covered by their current income
  • Can't sell their home because of the troubled housing market
  • Don't have enough income to meet their current expenses
  • Want to downsize to a smaller home.

It's important to shop around to compare reverse mortgages. In addition to the HECM program there are single-purpose reverse mortgages offered by some state and local government agencies and nonprofits--if you have a limited income and need funds to pay your property taxes or maintain your property, you may qualify for these products which have very low interest rates and almost no costs. There are also reverse mortgages, which are private loans back by the firms that develop them and may allow you to borrow higher amounts than an HECM. Use the mortgage calculators to compare deals and find the best loan for your situation.

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