Created in 1961, the reverse mortgage is one of the most popular loan products in the mortgage industry. However, despite many improvements to make reverse mortgages safer, they remain somewhat controversial among financial advisors.
Reverse mortgages are designed to help seniors use the equity in their home while enabling them to “age in place.” In other words, seniors with reverse mortgages can continue to live in their homes, while using the equity in their homes to provide access to capital for things like living expenses or medical expenses. To qualify for a reverse mortgage, you must:
- Be at least 62-years old;
- Own your home – either outright, or you must have substantial equity; and
- Use the home as your primary residence.
In addition, you must be able to pay your property taxes, insurance, HOA fees and home maintenance fees. Those who cannot comply with this requirement risk defaulting on the loan and losing their home.
The U.S. Department of Housing and Urban Development (HUD) answers questions about Home Equity Conversion Mortgages (HECMs) – the only reverse mortgage insured by the U.S. Government – on its website. However, understanding the pros and cons of these mortgages requires a bit more study. While not an exhaustive list, here are some of the pluses and minuses you should consider:
Reverse Mortgage Pros
Some of the basic pros of reverse mortgages include the elimination monthly mortgage payments, and that borrowers always own their homes. Reverse mortgages are also “non-recourse” loans, meaning you can never owe more than the value of your home at the time that you or your heirs sell it. Mortgagees have no restrictions on how they can use the funds, and the proceeds are tax free. But before you use the money for a trip around the world, you might want to weigh these other possible strategic uses:
Bridging the gap to Social Security. Funds from a reverse mortgage could be used as income, enabling a borrower to delay taking Social Security until age 70, when he or she can claim the maximum amount. In doing so, however, borrowers should consider whether fees for mortgage insurance and monthly servicing, as well as loan principal and interest, would be more than the additional increase in Social Security. USA Today discusses a recent study by the Consumer Financial Protection Bureau (CFPB) that explores the potential downside.
Using a reverse-mortgage line of credit. This strategy involves borrowers as young as 62-years old taking a reverse-mortgage line of credit. According to an article in the Wall Street Journal, the credit line would grow over time by amounts tied to interest rates, enabling the borrower to convert the unused portion to a substantial monthly income down the road. (If you read the comments section, you’ll see that some are not convinced of the efficacy of this strategy!)
Reverse Mortgage Cons
Reverse mortgages can be expensive. The most common “con” mentioned by experts is the cost of a reverse mortgage. Borrowers pay origination fees, mortgage insurance, and interest (which is typically at the end of the loan). According to the CFPB, reverse mortgages tend to be more expensive than other kinds of loans. That could be especially true if you choose an adjustable-rate reverse mortgage.
Not all reverse mortgages are created equal. While HECMs offer some protection, some proprietary reverse mortgages, such as “jumbo” reverse mortgages, often aren’t federally insured, come with higher risk, and don’t offer the same protections as HECMs.
Other family members could wind up homeless. In the past, some mortgages removed the non-borrowing spouse from the title, which meant that if the borrower died or moved, the spouse would need to sell the home to pay off the loan. Protections now exist for non-borrowing spouses, but not for other family members, such as a child with a disability still living at home.
You could lose your home if you don’t keep up with taxes and HOA fees. We often see horror stories in the media about seniors who wind up in default because they fell behind on their taxes, including this story about a 95-year-old woman.
Recently, HUD announced stricter limits on the amounts that borrowers can draw from their homes, along with higher upfront costs to get the loans. (Existing borrowers with reverse mortgages are not affected.) In addition, reverse mortgage borrowers will face higher initial insurance premiums, but some will see lower premiums in later years. HUD says the changes are necessary to stem losses in its HECM program. These changes went into effect on Oct. 2.
Not for Everyone
Reverse mortgages can be complex, and the advantages and disadvantages may vary according to a borrower’s goals and financial situation. If you’re considering a reverse mortgage, your financial advisor can help you weigh the benefits and explore other alternatives that may be a fit for you. If we can answer any questions for you, please feel free to contact us. We would be glad to help.
The information provided herein does not purport to be a complete description of reverse mortgages, their advantages, or disadvantages. This information has been obtained from sources deemed to be reliable but its accuracy and completeness cannot be guaranteed. Opinions expressed are those of Hannah Near and are not necessarily those of Raymond James. This material is being provided for educational purposes only, and is not, nor should it be construed as, a solicitation of a reverse mortgage. Raymond James Financial Services, Inc., and your Raymond James Financial Advisor do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. Tax or legal matters should be discussed with the appropriate professionals. Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members.