Reverse Mortgages: What Retirees Need to Know

Such circumstances can lead some retirees to consider a reverse mortgage. This type of loan allows those 62 and older to borrow against the equity in their home and get the cash they need to supplement their income, often at less than 3.5% annually. 

There are certainly benefits to using a reverse mortgage in the right circumstances. However, this type of loan can also come with some risks, so it’s critical to proceed cautiously and be sure that a reverse mortgage is the right fit.

If you are considering a reverse mortgage, it’s essential to understand how it works. 

This article will answer some common questions about reverse mortgages and examine some risks and potential disadvantages to help you make the wisest decision for your circumstances. 

What is a reverse mortgage?

The simplest definition of a reverse mortgage is just what it sounds like — a mortgage but in reverse!  

 In a traditional mortgage, the borrower must make monthly payments to a lender to pay back a loan the borrower previously used to buy or finance a home. A reverse mortgage, on the other hand, flips the transaction around: the borrower receives payment from the lender against a home that they already own. 

It’s not hard to see why reverse mortgages have been gaining popularity among older Americans who have accumulated equity in their home. Instead of selling the home and moving into a smaller or affordable dwelling, the loan enables them to stay in their homes and helps to finance retirement. 

What’s more, the homeowner does not have to pay anything upfront, can receive the funds as a lump, fixed monthly payment, or line or credit, and the loan is settled when the borrower either moves or passes away, so there’s no need to worry about repayment. 

It gets even better: reverse mortgage payments aren’t taxable. Payments are considered loan proceeds and not income, and the homeowner even retains the title to their home. 

 You’re right if that sounds too good to be true, and you’re wondering if there’s a catch. Not only are there plenty of reverse mortgage scams you’ll need to be wary of, but even legitimate reverse mortgages come with some unique strings attached. 

What are the disadvantages of a reverse mortgage?

The biggest drawback of a reverse mortgage is that your assets can decrease over time because you are leveraging your home’s equity, leaving you with less to pass on to heirs. As you get money through your reverse mortgage, the lender adds interest to the balance you owe each month. That means the amount you owe grows as your loan’s interest increases. If you intend to leave the house to your heirs, you will use up some, if not all, of the equity in your home. 

Additionally, the closing costs for a reverse mortgage can be as high or higher than a regular home loan, and the loan must be repaid within six months of the death of the last owner. Furthermore, the death of one of the owners or borrowers could cause the reverse mortgage to become due, even though the surviving spouse wishes to continue living in the home.  

Finally, when interest rates rise, the reverse mortgage cost may also increase. If you qualify for public assistance, you may need to include income or assets from a reverse mortgage. 

Are reverse mortgages safe?

However, considering those pitfalls, a legitimate reverse mortgage is as safe as any other kind of loan. That is to say, as long as you fully understand your obligations and can meet them, a reverse mortgage is a valid financial instrument. 

As mentioned above, many reverse mortgage scammers seek to prey on older Americans and con them out of their hard-earned money. 

Some scammers target veterans or seniors at risk of foreclosure, while others artificially inflate the value of the equity. Still, others encourage retirees to let them invest reverse mortgage proceeds into another house, then saddle them with a cheap property while pocketing the difference. Fraud can also come from trusted sources, such as contractors, financial planners, or even family members. 

While the details of each scam may differ, there are some common red flags. High-pressure sales tactics, confusing jargon, generic or unsolicited messages, and fees for information are all signs that you are dealing with a scammer. 

Always do your due diligence before signing any document. That means ensuring you understand everything, have researched the lender, and have spoken to trusted experts, including a reputable financial advisor. 

If you suspect someone is attempting to scam you, call HUD’s Office of Inspector General hotline: (800) 347-3735.

Is a reverse mortgage right for you?

If you are unwilling or unable to sell your home and need additional income during retirement, you may benefit from a reverse mortgage. 

Suppose you own and have considerable equity in your home (generally at least 50% of the property’s total value) or have entirely paid it off. In that case, securing a reverse mortgage is relatively straightforward. You find a lender and a program (a reverse mortgage counselor can assist with your search). Once you apply for the loan, the lender does a credit check and appraises your property.  

To qualify for a reverse mortgage, you must:

  • Be 62 years of age or older
  • Own the property outright or have a small mortgage balance
  • Occupy the property as your principal residence
  • Not be delinquent on any federal debt if it is a federally insured reverse mortgage. 

No income or employment qualifications are required to be eligible for a reverse mortgage, and, as previously mentioned, you do not have to repay the loan as long as the property is your principal residence and the mortgage obligations are met. 

The lender will determine the amount of your loan by the age of the youngest borrower, the current interest rate, the lesser of the appraised value or FHA mortgage limit, and the initial mortgage insurance premium. Additionally, you may finance closing costs into the mortgage.

The following types of property are eligible for a reverse mortgage:

  • Single-family home.
  • Multiple-unit home of 1–4 units with the eligible unit occupied by the borrower.
  • HUD-approved condominium.
  • Manufactured home that meets FHA requirements. 

A property must meet all FHA property standards and flood requirements to qualify.

The bottom line

If you are planning on leaving your home to your heirs, or if you are willing and able to move to a new residence, a reverse mortgage may not be the best choice for you.

However, if you are unwilling or unable to leave your home, need to supplement your income, and have no family members to whom you hope to leave your home, it can be a valuable tool to make retirement a little easier.

If you are unsure whether a reverse mortgage is a good fit, consult a financial expert to explore your options.

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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.

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Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004.  After a career of public accounting and general management, Jody knows the value of good financials.  Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.

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