Reverse Mortgage

A reverse mortgage is a loan available to older homeowners. The loan is given against the equity in a house. It is not paid back until the homeowner sells the property, or it is recovered through the estate after the owner has passed away.  

For some homeowners, particularly those over age 62 who do not wish to pass down their home to children, this can be a good solution to finance medical and/or long-term care costs.

Is This a Good Option for My Loved One?  

There are many advantages to a reverse mortgage loan:

The homeowners get to stay in their home.

There is flexibility in the loan distribution: lump sum, monthly payments, a line of credit, or a combination of the above. 

The money can be used for anything, such as health care costs, home modifications, long term care insurance, mortgage pay off, or new car purchase. 

There are no payments to be made, as the loan is not paid back until the homeowners move and sell the home, or until the estate sells the home after the homeowners pass away.  

The eligible loan amount is calculated using a formula that factors the homeowner’s age and the value of the home. The lender will not lend more than the value of the home. 

Generally, the older the homeowner, the more equity he can access. This is related to interest. Interest accrues on a reverse mortgage just as it does with any other loan, which means that over time the repayment amount grows as interest compounds the original loan amount. Therefore the amount of equity lent is roughly the value of the home less the estimated interest. 

The interest is estimated based on the age of the borrower; the average amount of time before the borrower repays the loan decreases with the age of the borrower, which decreases the percentage of interest accrued over time.   

When the homeowner or the estate sells the home, the bank collects on the balance of the loan. If the home sells for more than the balance, the remaining money goes to the homeowner’s estate. So what happens in a bad real estate market and the home sells for less than the loan? If the home sells for less than the balance of the loan, the bank cannot collect any further. Reverse mortgages are non-recourse, meaning the bank cannot go after the estate or homeowner’s other assets.

By taking a reverse mortgage, you are not selling your home to the bank. Just as with a home equity loan, you are only putting a lien on the title. You may repay the loan at any time and maintain ownership of your property. Similarly, your heirs may choose to repay the loan after you have passed and maintain ownership. Unlike a traditional mortgage, you are not at risk for foreclosure, as there are no monthly payments to make. However, you do have to keep up taxes and insurance, and letting these payments lapse while you home is under reverse mortgage could have dangerous implications.  

Reverse mortgages are generally safe. Still, they should not be entered into without careful consideration and planning. Do some research and speak with reputable reverse mortgage specialists. The Federal Housing Authority has a reverse-mortgage program call Home Equity Conversion Mortgage (HECM). This may be the safest option for a reverse mortgage, but it does require that the homeowner carry FHA mortgage insurance in addition to home insurance.

There are scams to be aware of in the world of reverse mortgages. There have been documented instances of financial institutions lending a reverse mortgage for the purpose of financing the borrower to purchase a high-commissioned financial investment, regardless of whether or not it is the right choice for the homeowner. 

You should be skeptical of any financial advisor encouraging you to take a reverse mortgage to purchase a product from his firm or any other financial institution.

Are There Costs Involved in Reverse Mortgages?  

Yes, and the closing costs and fees of a reverse mortgage can sometimes be higher than costs associated with other options, such as a home equity loan. Before signing the contract, ask your lender about these fees and how you might be able to finance them into the loan.