Are There Any Safe Reverse Mortgages?

If you’re a homeowner age 62 or older with significant equity in your home, a reverse mortgage might enable you to draw cash from your home equity to supplement your income, cover emergency expenses or pay off your other debt. With a reverse mortgage, you don’t have to repay the loan for as long as you live in your home.

The U.S. Department of Housing and Urban Development has issued reverse mortgage rules that protect consumers, and the Federal Housing Administration guarantees the most common type of reverse mortgage, a home equity conversion mortgage. HECMs have built-in safeguards against deceptive sales practices to make them trustworthy choices for borrowers. Here’s what you need to know about how safe reverse mortgages are.

What Is a Reverse Mortgage?

A reverse mortgage is a loan against the equity in your home that you don’t have to repay for as long as you live in it. With a conventional mortgage, you borrow money to purchase a home and pay down the balance over time. With a reverse mortgage, each payment you receive reduces your equity and increases your debt.

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How to Qualify for a Reverse Mortgage

Most reverse mortgages are FHA-guaranteed HECMs, according to the National Reverse Mortgage Lenders Association. HUD rules mandate that HECM borrowers receive counseling before they commit to this type of loan to ensure that they understand the eligibility requirements, benefits and risks.

To qualify for an HECM, you must meet the following requirements:

• You are at least 62 years old.
• Your home is your primary residence.
• The mortgage on your home is paid off or has a balance low enough for you to pay it off with money from your reverse mortgage transaction.
• You have the financial means to pay your property taxes and insurance.

Reverse mortgage interest rates vary by lender and costs might include counseling, appraisal, origination and closing cost fees as well as mortgage insurance premiums. You can roll many of these costs into the loan, according to HUD. Because these fees vary, compare quotes from several different reverse mortgage lenders to get the best deal.

HECMs enable you to take your funds on a set schedule or draw against a line of credit if you opt for an adjustable interest rate. Fixed-rate loans are paid in lump sums.

Reverse mortgage solutions are unique because they don’t have to be repaid unless the borrower dies or sells the home. If you move or die, the loan can be repaid using other assets or proceeds from the sale of the home. When the payment comes due, neither you nor your heirs repay more than the home is worth, regardless of the loan balance.

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Drawbacks of Reverse Mortgages

Like any financial tool, reverse mortgages have pros and cons. Understand the drawbacks of reverse mortgages and decide if any are deal breakers for you:

• You might risk foreclosure if you fall behind on insurance or tax payments.
• In some cases, your spouse can be forced to repay the loan if you die or enter long-term care.
• The tendency to spend lump-sum payments might cause you to come up short if you need to draw more from your equity later.

Reducing the Risks of Reverse Mortgages

Reverse mortgage risks are relatively easy to mitigate by assessing your cash requirements, researching your options and selecting a conservative payment plan. Use these tips to stay on track:

• Consider taking a line of credit or monthly draws instead of a lump sum payment. Incremental withdrawals reduce the likelihood you’ll use up your equity too quickly.
• Include your spouse as a co-borrower on the loan to ensure he can stay in the home if you die or enter long-term care. As a co-borrower, your spouse can continue to receive monthly payments or draw against a line of credit.
• Use a reverse mortgage that allows you to set aside funds for home maintenance, homeowners insurance and property tax to avoid defaulting on the loan.
• Wait as long as you can before applying because older borrowers qualify for higher loan amounts.

Reverse mortgages aren’t always the perfect solution for seniors who need cash, but if you choose carefully and use them wisely, these loans can be an excellent choice if it looks like you’ll outlive your retirement savings.

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