This story originally appeared on NewRetirement.
Do you know your reverse mortgage facts? More and more people are becoming aware of reverse mortgages as an option for tapping their home’s equity.
Maybe you heard about these loans on a personal finance blog or from Tom Selleck on late-night TV. However, what is really true?
With all of the buzz about retirement financing options today, it can be difficult to sort out what to believe when the information you get is incomplete or sounds like marketing spin.
Are reverse mortgages safe? How does the government fit in? Can anyone get a reverse mortgage?
Here are reverse mortgage facts to know before using this type of loan to supplement your retirement income.
1. Reverse mortgages are available for many homeowners (over 62 years old)
There are some restrictions on who can apply for a reverse mortgage. The primary borrower must be 62 years old and must have enough home equity to qualify.
There will also be a financial assessment to determine that the borrower is fit to uphold the requirements of the loan. Other than that, reverse mortgages are available for anyone who wants to tap their home’s equity without going through the process of taking out a traditional mortgage.
Reverse mortgages are used by many different types of households, from high net worth couples and individuals who are riding out market swings that are impacting their other investments to families that need additional monthly cash flow to help make ends meet.
There’s no one reason to take a reverse mortgage, and there’s no one person for whom the loan is the “right” option. To find out if you qualify for a reverse mortgage, you can get a free estimate or talk with a financial planner.
2. It’s just a loan: You continue to own your home with a reverse mortgage
Many people erroneously believe that the bank or the government owns your home when you get a reverse mortgage. A reverse mortgage is a loan, and reverse mortgage borrowers hold the title to their homes throughout the entire course of the loan.
The amount of your loan depends on factors including your age, the value of your home and current interest rates. If you know the value of your home, you can get a free estimate of the loan amount you may eligible for.
Once the loan becomes due because the borrower passes away or moves, the borrower or his or her heirs will be responsible for repaying the loan.
Often, this is done through the sale of the home, and, if the value of the loan is greater than the value of the house, the amount of the loan not paid by the sale of the house is paid by mortgage insurance. Reverse mortgage borrowers do not have to pay more than the value of the home when the loan comes due.
3. Your heirs have options
Although it’s often the case that heirs sell the home to repay the reverse mortgage, that is not their only option on these loans. In the case where a borrower has passed away, heirs are entitled to pay off the reverse mortgage through whatever means they choose.
If they are able and wish to repay the loan with outside funds and keep the home, that’s up to them.
Many families would rather get a reverse mortgage than lose independence or compromise their quality of life.
4. It’s likely to reduce your net worth
A reverse mortgage is a loan that allows a borrower to take from the home equity he or she has amassed over time. Once this money is spent, the home holds less value.
There is also interest that accrues and must be repaid when the loan comes due. Because of this, a reverse mortgage is likely to reduce your net worth.
5. Reverse mortgages are getting more popular
Three trends are making reverse mortgages more popular than ever before:
- Americans have not saved enough.
- Housing prices are at all-time highs.
- The federal Home Equity Conversion Mortgage program has had many recent modifications aimed at making it a safer product for seniors.
6. Timing a reverse mortgage well can mean more money
When there are low interest rates and high housing prices, it can be a good time to get a reverse mortgage.
However, the decision to get a reverse mortgage should be part of your overall financial plan.
7. Reverse mortgage TV ads are confusing
A 2015 study by the Consumer Financial Protection Bureau (CFPB) found that reverse mortgage TV ads are often misleading or confusing.
Reverse mortgages are somewhat complicated and it is important to understand fact versus fiction. Here are the truths behind the ads.
8. Reverse mortgages may not be better than downsizing
Drawing on your home equity is one option to free up that home equity in retirement, but downsizing is another popular choice.
By selling your home and relocating to a smaller property, you may find more financial efficiency than if you were to take out a reverse mortgage on your existing home.
However, if staying in your current home is your goal, a reverse mortgage may be an option worth considering.
9. Reverse mortgages have several different payment options
Most people are familiar with the “lump sum” option for receiving reverse mortgage proceeds.
In fact, the lump sum reverse mortgage has lost popularity in recent years due to changes to the Home Equity Conversion Mortgage (HECM) program.
Today’s borrowers are more often taking their reverse mortgages as credit lines, or under term (for a set number of years) or tenure-payment (for life) plans.
10. Reverse mortgages do have upfront costs
Like any home loan, borrowers face upfront costs including a mortgage insurance premium, an origination fee paid to the loan originator, appraisal fees, counseling fees and additional closing costs such as title and notary fees.
The origination fee for HECM loans is capped, but it’s a good idea to ask what these potential fees are likely to total in advance of paying them.
11. Most (not all) reverse mortgages are government-guaranteed
The vast majority of reverse mortgages are taken out as HECM loans under the government-insured program.
There are also private reverse mortgages available through lenders that may offer some additional benefits to borrowers, such as the ability to borrow a higher level of home equity.
12. Home equity is the biggest source of wealth for most Americans
According to the Federal Reserve, 80% of Americans’ non-financial assets are represented by their homes, and a 2015 report published by the Brookings Institute reports that home equity is the biggest source of credit for most Americans.
Home equity may be your biggest asset and, therefore, a viable option for financing your retirement. A reverse mortgage is one way to tap into this home equity.
13. There’s more than one type of reverse mortgage
Reverse mortgages are not limited to the HECM type, nor are they strictly loans used to remain in the home you currently own. Here are the most popular types of reverse mortgages.
- Lump-sum: The borrower gets the entire loan at once.
- Annuity or tenure plan (monthly payments): The lender makes payments for as long as at least one borrower lives in the home as a principal residence.
- Term payments: The loan is structured in monthly payments for a set term.
- Line of credit: This reverse mortgage is similar to a home equity line of credit (HELOC).
- Tenure plan and a credit line: The borrower gets monthly payments as in a Tenure Plan, and they are also offered a Line of Credit.
- Term payments and a credit line: The borrower gets monthly payments as in a Term Plan, and at the end of the term, they are offered a Line of Credit.
If you are looking to get a reverse mortgage and purchase a new home in a single transaction, contact a reverse mortgage specialist to learn more about the HECM for Purchase program. As there are different problems facing many households, there are different reverse mortgage types to help solve them.
14. The right decision depends on you
Getting a reverse mortgage is not for everyone. Like most things, the decision to get a reverse mortgage — or not — depends entirely on you. There are many different personal factors to consider.
If you are unsure whether the loan is right for you, you might consider using the reverse mortgage suitability quiz, or get a quick estimate of how much you may be able to borrow.
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