Make sure you understand all the costs, terms and conditions before applying for a reverse mortgage.
Reverse mortgages are widely advertised to older adults as a way to convert part of the equity in a home to cash in the form of a loan – without having to sell the property. The cash may be paid to you in installments or a lump sum, and you must pay back the loan when you sell your house, move or pass away.
This arrangement can be useful if you have paid off most or all of your current mortgage and want to access that equity without having to move. However, because these loans are so attractive, unscrupulous individuals sometimes try to cash in and will target older adults in particular.
Reverse mortgages may also come with strings attached. The amount you owe toward the reverse mortgage will grow substantially over time with interest and can end up equaling the value of the home. If you want heirs to inherit your home, keep in mind that the loan will impact your assets in the event of your death. You are also still responsible for home property taxes, insurance and maintenance costs when you take out a reverse mortgage.
Tips to consider before applying for a reverse mortgage:
• Know the basic requirements.
• To apply for a reverse mortgage, you must be 62 years or older and have equity in the home.
• The home must be the primary residence and remain in good condition.
• A Home Equity Conversion Mortgage (HECM) is the only federal government-insured reverse mortgage, and the loan process can’t be initiated until the senior receives counseling from an HECM counselor.
• Factors such as your age, the type of product, the value of your house and how much you owe on your house all contribute to the amount you may borrow.
• Watch out for up-front fees. It’s likely a red flag if a company tries to charge you excessive, up-front fees for services that are available free of charge or at a very low cost through the Department of Housing and Urban Development (HUD). Check your options with HUD before making any decisions.
• Consult an HECM counselor. An HECM counselor will help answer questions regarding eligibility, financial implications and other alternatives. The Fair Housing Association (FHA) does not recommend using any service charging a fee for referring a borrower to an FHA lender, as FHA provides all the information free of charge, and HECM housing counselors are available free or at a low cost. For a list of approved counseling agencies, click here or call 800-569-4287.
• Check out lenders with BBB. Search BBB.org to find trustworthy lenders near you, and read reviews and complaints to see a company’s track record.
• Talk to your heirs. A reverse mortgage affects the assets of the borrower in case of death, which means it could impact your heirs. Discuss the reverse mortgage with heirs before making a decision.
• Check if a reverse mortgage makes sense for you. Ask yourself if it’s feasible for you to keep the home long enough to make the reverse mortgage economical. You should consider your future health care needs, and whether the home will always be safe and easy to get around. If the answer is “no,” look into other options.
• Consider all the costs. Processing a reverse mortgage usually involves fees such as an origination fee, closing costs, a mortgage insurance premium, a servicing fee and the interest rate.
• Understand the repayment terms. A reverse mortgage loan must be repaid in full when the owner dies or sells the home. Other conditions that affect loan repayment include failure to pay property taxes or hazard insurance, allowing the property to deteriorate, and if the borrower permanently moves, has a new primary residence, or fails to live in the home for 12 consecutive months.