What are the reverse mortgage pros and cons and why should you care?
If you pay attention to the news, you’ve probably seen “reverse mortgage” pop up in the headlines at least once or twice. They’re a pretty hot topic right now in the mortgage industry, and for good reason. While we don’t sell reverse mortgages, we have thoughts on reverse mortgage pros and cons, as well as what’s happening with them right now in the marketplace, that you might want to consider.
REVERSE MORTGAGES: WHAT ARE THEY?
Reverse mortgages are a type of mortgage available to homeowners that are 62 years of age or older—as such, they are sometimes used by retirees. One reason retirees may take out a reverse mortgage is to fund living expenses when retirement income runs scarce. For some, a reverse mortgage may help to avoid the need to sell the family home and downsize or move into a retirement home. With a reverse mortgage, borrowers are not required to make monthly principal and interest payments to their bank or lender, as they would be required to do with a typical purchase or refinance mortgage. Instead, their bank or lender pays them, in one or multiple lump sums, or via a line of credit. Reverse mortgages allow retirees to tap into their home equity in order to pay for miscellaneous expenses and do not require repayment until after the borrower’s death (assuming certain conditions continue to be satisfied, such as continued ownership and occupancy of the home and payment of taxes and insurance).
If a retiree is looking for extra cash without depleting their other non-home assets—and the flexibility to not make monthly principal or interest payments that is not available with other types of mortgages—a reverse mortgage may be a viable solution. Regardless of a retiree’s financial situation or what happens in the industry, a reverse mortgage lender cannot change the terms of a reverse mortgage or demand the loan’s repayment unless the borrower dies, the borrower no longer occupies the home as a principal residence, the borrower fails to pay taxes or insurance, or some other default event.
WHAT’S ALL THE FUSS ABOUT?
So, with some of the potential “pros” covered, why are reverse mortgages sometimes criticized? Some argue that reverse mortgages have a tendency to encourage older homeowners to spend recklessly, which can deplete their assets. Plus, historically, reverse mortgage scam efforts were widely reported. One way to help determine whether you’re being scammed is through reverse mortgage counseling, which the Federal Housing Administration (FHA) requires borrowers to complete in order to get an FHA-insured reverse mortgage. (Currently, nearly all reverse mortgage originations are for FHA-insured Home Equity Conversion Mortgages.)
Recently, reverse mortgages have garnered attention because of changes to the Home Equity Conversion Mortgage (HECM) program that the current administration implemented to protect the government from future losses. These changes may result in higher costs and smaller loans for some homeowners.
Another item for consideration is the fact that, when reverse mortgage borrowers die, their children may not be able to inherit the home. If the heirs can’t pay off the loan, the deceased’s lender may acquire the home.