Reverse mortgages are widely advertised to seniors as a popular way to access the equity of their home, which may be attractive to consumers seeking a quick source for cash during tough financial times like the COVID-19 pandemic. Homeowners should fully understand all the costs, terms and conditions before applying for a reverse mortgage.
A reverse mortgage allows homeowners to convert part of the equity in a home to cash without having to sell the property. The cash may be paid to you in installments or a lump sum, so typically you don't need to pay anything back if you live in your house.
Due to the attractiveness of these loans, senior citizens should be on guard against being charged excessive upfront fees for services that are generally available free of charge or at a very low cost through the Department of Housing and Urban Development (HUD).
Reverse mortgages also may come with some significant strings. Consumers should understand that because they're deferring repayment of the reverse mortgage until they move out of their home or die, the amount they owe will grow substantially over time. Interest charges are added to the loan each day it's held, so it's possible the reverse mortgage may grow to equal the value of the home. People who take out reverse mortgages also are still responsible for property taxes, insurance and maintenance costs.
Some ads say heirs can inherit the home, but remember, to keep it they must pay off the reverse mortgage loan along with possible fees and charges that can add up.
Those who need cash might consider getting a less costly home equity line of credit and check into programs that help defer or lower taxes and utility bills.
Tips to consider before applying for a reverse mortgage:
- Know the basic requirements. To apply for a reverse mortgage, a senior must be 62 years or older and have equity in the home. The home must be the primary residence and remain in good condition. A Home Equity Conversion Mortgage (HECM) is the only federal government-insured reverse mortgage, and the loan process can’t be initiated until the senior receives counseling from an HECM counselor. Factors such as your age, the type of product, the value of your house and how much you owe on your house all contribute to the amount you may borrow.
- Consult an HECM counselor. An HECM counselor will help answer questions regarding eligibility, financial implications and other alternatives. The Fair Housing Association (FHA) does not recommend using any service charging a fee for referring a borrower to an FHA lender, as FHA provides all the information free of charge, and HECM housing counselors are available free or at a low cost. For a list of approved counseling agencies, click here or call 800-569-4287.
- Involve heirs in the decision. Since a reverse mortgage affects the assets of the borrower in case of death, involving heirs will avoid future misunderstandings.
- Make sure a reverse mortgage suits your needs. Determine whether it is practical to keep the home long enough to make the reverse mortgage economical. Consider future health care needs as well as safety and ease of use of the home.
- Consider all the costs associated with obtaining a reverse mortgage. Be prepared to pay for some of the fees involved in the processing of a reverse mortgage loan, which can include an origination fee, closing costs, a mortgage insurance premium, a servicing fee, and the interest rate.
- Understand the repayment terms. A reverse mortgage loan must be repaid in full when the owner dies or sells the home. Other conditions that affect loan repayment include failure to pay property taxes or hazard insurance, allowing the property to deteriorate, and if the borrower permanently moves, has a new primary residence, or fails to live in the home for 12 consecutive months.
For a full list of reverse mortgage requirements, contact the U.S. Department of Housing and Urban Development.
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