If you are in your 60s and own your home, you have likely heard about reverse mortgages — or will soon. Reverse mortgages can be helpful to homeowners who want to stay in their homes but are having trouble keeping up with their mortgage payments, or who have no other source of funds to pay bills or meet unexpected expenses. As more Americans near retirement age, some financial institutions are aggressively marketing reverse mortgages as an easy, cost-free way for retirees to finance lifestyles — or to pay for risky investments — that can jeopardize their financial futures.
Homeowners thinking about reverse mortgages are urged to make informed decisions and carefully weigh all of their options before proceeding. And, if you do decide a reverse mortgage is right for you, be sure to make prudent use of your loan.
Older homeowners who want to tap the equity in their homes typically have three options. They can sell their house and downsize, take out a home equity loan or
consider a reverse mortgage. A reverse mortgage is an interest-bearing loan secured by the equity in your home. To be eligible, you and any other co-borrowers, such as your spouse, must own your home and be 62 or older — although some lenders offer reverse mortgages to individuals as young as age 60.
Like a home equity loan, a reverse mortgage allows you to convert your home equity to cash that you can use for any purpose. Unlike other home loans, however, homeowners make no interest or principal payments during the life of loan.
The interest is added to the principal, which is why reverse mortgages are often called “rising debt” loans. Unless you opt for a fixed-term loan, the loan only becomes due when you die, sell your home to move or otherwise leave your home for more than 12 months — for instance, if a health issue requires you to enter a nursing home.
If any of those events occur, you or your heirs must repay the loan, including compounded interest, in full. Normally, that means the house must be sold, and the loan will be paid back from the proceeds of the sale. Because interest will have been accruing during the life of the loan, you will likely owe more than you borrowed — and if home values have fallen or you live longer than expected, you may even owe more than your house is worth.
But since reverse mortgages are non-recourse loans, the worst that will happen is that you or your heirs will receive nothing from the sale of your house. The lenders cannot go after any other assets that you or your heirs own.
Home Equity Conversion Mortgages, or HECMs, are administered by the Federal Housing Administration (FHA) and make up the majority of reverse mortgages in the U.S. The loans are insured by the federal government against default by a lender (the borrower pays a fee for this protection). The Housing and Economic Recovery Act of 2008 made significant changes to FHA reverse mortgages and how they are sold.
For example, the law allows seniors to use a reverse mortgage to purchase a new home (called a “reverse mortgage for purchase”). It also mandates counseling for all FHA reverse mortgages.
Additional changes resulted from the Reverse Mortgage Stabilization Act of 2013, which authorized FHA to change the HECM program. FHA replaced the Standard and Saver HECM options with a single program that is different in a number of ways. For one, it adjusted the maximum loan amount.
Based on a formula tied to the borrower’s age and current interest rates, this new maximum is less than the previous HECM Standard, though slightly higher than the HECM Saver option.
There are also new limits on the amount homeowners can borrow at closing and during the first 12 months. This new limit is 60 percent of the maximum loan amount, though making repairs or paying off an existing mortgage may constitute “mandatory obligations” that could allow for additional borrowing.
And lenders are now required to perform a financial assessment of the borrower before a HECM loan can be approved. Part of the assessment is a detailed credit check.
Non-HECM single-purpose reverse mortgages may be offered by some states, local governments and nonprofit organizations for specific objectives such as home repairs or the payment of property taxes. There may be income restrictions accompanying these reverse mortgages, and they are not federally insured.
Banks and other lenders may also offer proprietary reverse mortgages, often called jumbo reverse mortgages. These are typically designed for borrowers with high-value homes. Proprietary reverse mortgages are not federally insured, and fees are not regulated as they are with HECM loans. It’s a good idea to work with a HUD-approved mortgage counselor if you are considering either of these non-HECM options (there may be a fee for counseling services).
You can read more about reverse mortgages at FINRA’s website. FINRA is the largest independent regulator for all securities firms doing business in the United States. Its chief role is to protect investors by maintaining the fairness of the U.S. capital markets.