Reverse Mortgage Shoppers Guide
Reviewer: Aaron Creighton | December 3, 2018
Your home equity can provide an income opportunity, if and when needed. Reverse mortgages have benefits and drawbacks, depending on your unique situation.
Reverse Mortgages Overview
If you’re 62 or older – and want money to pay off your mortgage, supplement your income, or pay for healthcare expenses – you may consider a reverse mortgage. It allows you to convert part of the equity in your home into cash without having to sell your home or pay additional monthly bills. But take your time: a reverse mortgage can be complicated and might not be right for you. A reverse mortgage can use up the equity in your home, which means fewer assets for you and your heirs. If you do decide to look for one, review the different types of reverse mortgages, and comparison shop before you decide on a particular company.
Read on to learn more about how reverse mortgages work, qualifying for a reverse mortgage, getting the best deal for you, and how to report any fraud you might see.
When you have a regular mortgage, you pay the lender every month to buy your home over time. Reverse mortgages take part of the equity in your home and convert it into payments to you – a kind of advance payment on your home equity. The money you get usually is tax-free. Generally, you don’t have to pay back the money for as long as you live in your home. When you die, sell your home, or move out, you, your spouse, or your estate would repay the loan. Sometimes that means selling the home to get money to repay the loan.
There are three kinds of reverse mortgages:
- Single purpose reverse mortgages – offered by some state and local government agencies, as well as non-profits
- Proprietary reverse mortgages – private loans
- Federally-insured reverse mortgages – also known as Home Equity Conversion Mortgages (HECMs).
The money you get usually is not taxable, and it generally won’t affect your Social Security or Medicare benefits. When the last surviving borrower dies, sells the home, or no longer lives in the home as a principal residence, the loan has to be repaid. In certain situations, a non-borrowing spouse may be able to remain in the home. Here are some things to consider about reverse mortgages:
- There are fees and other costs – make sure you read the fine print
- You owe more over time – because interest is added to the loan
- Interest rates may change over time – many have variable interest rates
- Interest is not tax deductible each year – only when the loan is fully paid off
- You have to pay other costs related to your home – owning a home is expensive
If you’re considering a reverse mortgage, shop around. Decide which type of reverse mortgage might be right for you. That might depend on what you want to do with the money. Compare the options, terms, and fees from various lenders. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. And ask lots of questions to make sure a reverse mortgage could work for you – and that you’re getting the right kind for you.
If so, find out if you qualify for any low-cost single purpose loans in your area. Staff at your local Area Agency on Aging may know about the programs in your area. Find the nearest agency on aging at eldercare.gov, or call 1-800-677-1116. Ask about “loan or grant programs for home repairs or improvements,” or “property tax deferral” or “property tax postponement” programs, and how to apply.
You might be able to borrow more money with a proprietary reverse mortgage. But the more you borrow, the higher the fees you’ll pay. You also might consider a HECM loan. A HECM counselor or a lender can help you compare these types of loans side by side, to see what you’ll get – and what it costs.
This bears repeating: shop around and compare the costs of the loans available to you. While the mortgage insurance premium is usually the same from lender to lender, most loan costs – including origination fees, interest rates, closing costs, and servicing fees – vary among lenders.
Ask a counselor or lender to explain the Total Annual Loan Cost (TALC) rates: they show the projected annual average cost of a reverse mortgage, including all the itemized costs. And, no matter what type of reverse mortgage you’re considering, understand all the reasons why your loan might have to be repaid before you were planning on it.
Is a reverse mortgage right for you? Only you can decide what works for your situation. A counselor from an independent government-approved housing counseling agency can help. But a salesperson isn’t likely to be the best guide for what works for you. This is especially true if he or she acts like a reverse mortgage is a solution for all your problems, pushes you to take out a loan, or has ideas on how you can spend the money from a reverse mortgage.
For example, some sellers may try to sell you things like home improvement services – but then suggest a reverse mortgage as an easy way to pay for them. If you decide you need home improvements, and you think a reverse mortgage is the way to pay for them, shop around before deciding on a particular seller. Your home improvement costs include not only the price of the work being done – but also the costs and fees you’ll pay to get the reverse mortgage.
Some reverse mortgage salespeople might suggest ways to invest the money from your reverse mortgage – even pressuring you to buy other financial products, like an annuity or long-term care insurance. Resist that pressure. If you buy those kinds of financial products, you could lose the money you get from your reverse mortgage. You don’t have to buy any financial products, services or investment to get a reverse mortgage. In fact, in some situations, it’s illegal to require you to buy other products to get a reverse mortgage.
Some salespeople try to rush you through the process. Stop and check with a counselor or someone you trust before you sign anything. A reverse mortgage can be complicated, and isn’t something to rush into.
The bottom line: If you don’t understand the cost or features of a reverse mortgage, walk away. If you feel pressure or urgency to complete the deal – walk away. Do some research and find a counselor or company you feel comfortable with.
With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty. This is known as your right of “rescission.” To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.