For many years, pursuing a reverse mortgage was a bad idea. Specialty lenders gave this financial product a bad name, with high fees, obfuscating language, and cheesy pitches from second-tier celebrities. As one reader commented on an article in The New York Times, “they’re nothing but a scam that nobody with any common sense should fall for.”
Yet in recent years, tighter consumer regulations have helped bring sunshine to disinfect this once-hated form of borrowing. And for many people that hope to age in their own homes, these reverse mortgages now hold clear appeal.
A well-regarded study by the Journal of Financial Planning has helped shed light on the newly-improved reputation for these kinds of mortgages. Tapping into this equity, instead of just selling stocks and bonds as you age, can be a savvy portfolio management tool.
Let’s take a quick look at how they work, and where you (or an aging relative) should seek out help.
Lenders will order a property appraisal to determine how much your home is worth and how much you can borrow in a reverse mortgage. Once approved, reverse mortgages provide monthly payments (or can be structured to act as a credit line to tap when needed). You’ll be able to draw down the equity in your home until you have hit a minimum level of equity in your home.
You’ll still have to take care of home-related expenses such as property taxes, homeowners insurance and other household maintenance costs as long as you live in the home. And know that the loan origination fees to get a reverse mortgage can approach $6,000.
Most reverse mortgages are issued as Home Equity Conversion Mortgages, or HECMs, which are insured by the Federal Housing Administration. So you’ll want to choose an FHA-approved lender. Non-HECM reverse mortgage lenders offer their own products, but they don’t have the same consumer protections as HECMs.
To qualify. You must be 62 or older. Also, you can’t have any delinquent federal debts, and you’ll need to own your home outright (or at least have a high amount of equity in it). If you are still making mortgage payments, then the reverse mortgage will pay off that mortgage and eliminate monthly mortgage payments (your traditional mortgage balance is rolled into the reverse mortgage).
Once you inquire about them, you’ll need to attend a mandatory counseling session with a HECM counselor approved by the Department of Housing and Urban Development
The FHA doesn’t insure loans from unapproved lenders, so there’s no guarantee you’ll get the same protections — such as letting an eligible nonborrowing spouse stay in the home after your death — if you use one.