Most people have heard about reverse mortgages. There is a great deal of misinformation and confusion out there about reverse mortgages. To some, reverse mortgages seem like a scam designed you take their house from them. To others, a reverse mortgage can seem financially life-saving.
As a real estate attorney with more than 25 years of experience closing all types of mortgage loans, I will try to clarify for you exactly what a reverse mortgage is and why you might or might not want to consider getting one. I have closed tens of thousands of mortgage loans in my career as an attorney. I really don’t know how many reverse mortgage transactions I have closed, but it is certainly in the hundreds.
I think that I have encountered just about every possible scenario and want to offer my advice to anyone considering a reverse mortgage. I will try to answer the most common question that I receive.
What is a Reverse Mortgage?
There are several types of reverse mortgages. Private companies or individuals can make reverse mortgages as can state and local governments. By far the most common reverse mortgages are those under the FHA’s Home Equity Conversion Mortgage (HECM) program. All major reverse mortgage lenders that I am aware of make HECM loans and these are the only type of reverse mortgage that I would recommend. Because of that, everything in this article will apply only to the HECM mortgages.
In its simplest form, a reverse mortgage is simply a mortgage loan on the home where the payments that would normally be made are added to the loan balance. In a traditional mortgage, a homeowner borrows money from the bank and over the life of the loan they make principal and interest payments to the bank. The portion of the payment that goes to principal gradually reduces the amount owed to the bank so that one day the loan is paid off.
In a reverse mortgage, the bank loans homeowners money and the interest that accrues each month is added to the balance of the loan. Let’s say that a homeowner borrows $100,000 from the bank on a reverse mortgage. The interest on that amount would be somewhere in the neighborhood of $400 per month. After the first month the balance on the loan would go from $100,000 to $100,400. In a reverse mortgage the balance will increase every month.
Why Would Anyone Want a Reverse Mortgage?
Reverse mortgages are not right for everyone. In fact, for some people, a reverse mortgage would be a really bad idea. Reverse mortgages are not a good idea for people:
- Who do not plan to stay in their homes long-term
- Who are concerned with leaving most of the equity in their home to their heirs
- Who have other sources of income that will allow them to maintain their current lifestyle
Reverse mortgages are ideal for people:
- Who are planning on staying in their current home for the rest of their lives
- Whose children or heirs are financially stable and who will not be harmed by not inheriting the equity in the home
- Who have equity in their home, but who are struggling with having enough income to live the kind of lifestyle that they wish to maintain
The typical people who I see obtaining a reverse mortgage, are retired people who have worked very hard all of their lives and who have obtained some equity in their current home. They are happy with their current home and plan to stay there for the rest of their lives. However, their current retirement income seems insufficient to keep up with their expenses. They use the reverse mortgage to eliminate their house payment thereby allowing them to use the money that they once used for their house payment for other living expenses.
Many people that I close reverse mortgages for, don’t actually take out any cash. They merely get a loan amount large enough to pay off any current debt on the home or other consumer debt. This allows them to cease making any sort of mortgage payments and to preserve as much of the equity in the house as possible.
What are the Requirements for Obtaining a Reverse Mortgage?
The main requirements are that all homeowners must be over the age of 62. They must own the home outright or have equity in their home. They also must be able to show that they have the financial resources to continue to pay the property taxes, homeowners and/or flood insurance. In addition, they must be able to show that they have sufficient resources to keep the home maintained to a reasonable standard.
If the homeowners can’t show this, the bank may require that a portion of the loan funds be set aside and held by the bank in order to pay these expenses as they come due.
What Happens When the Last Homeowner Leaves the Home?
When the last homeowner leaves the home either through death or because they need to leave for medical or other reasons, the loan then is considered to have matured and becomes due and payable to the lending institution. The bank considers the last owner to have left the home if the homeowners are absent from the home for twelve (12) consecutive months. This allows homeowners to be away from the home for extended periods without triggering a maturity event on the loan.
There are several scenarios for what can happen at this point.