A Closer Look at an Important Financial Tool
The reverse mortgage dates all the way back to 1961. Nelson Haynes was an employee at Deering Savings & Loan, a small bank in Portland, Maine. Nellie Young was the widow of Nelson’s high school football coach. He designed a unique loan that would allow her to continue living in her home after her husband passed away.
The concept of a loan that enables older homeowners to tap into their equity and keep their homes struck a chord. By the next decade, private banks began offering their own reverse mortgages.
The idea really took off in the 1980s. A pilot program to offer government-insured reverse mortgages was rolled out in 1987. President Ronald Reagan signed the Housing and Community Development Act into law in 1988, marking the establishment of the modern reverse mortgage. These were now called Home Equity Conversion Mortgages — HECMs, for short. Today HECMs are insured by the Federal Housing Administration (FHA) which is part of the Department of Housing and Urban Development (HUD).
So What Are They?
A reverse mortgage is a type of loan that allows you to borrow money on the equity in your home without having to sell it or make monthly payments. Equity is the difference between the value of your home and the amount you owe on your mortgage. A reverse mortgage can provide you with a source of tax-free income to supplement your retirement and pay for home improvements, medical expenses, or other needs.
How Do They work?
There are a number of qualifications: you must be at least 62 years old; you must own your home outright or have a low mortgage balance; you must live in the home as your primary residence; you must meet certain financial and property requirements; and, you must receive counseling from a HUD-approved counselor before applying for a reverse mortgage.
The amount of money that can be borrowed depends on things like your age, your home’s value, the interest rate on the loan and the type of reverse mortgage you choose. There are actually several different types of reverse mortgages, but only HECMs are insured by the federal government.
You can choose to receive the money as a lump sum, a line of credit, fixed monthly payments or a combination of these options. The money can be used for any purpose, and you don’t have to pay it back as long as you live in the home, maintain it, and pay the property taxes and insurance. The loan becomes due when you die, sell the home or permanently move out. At that point, you or your heirs can either pay off the loan or sell the home to repay the loan.
Benefits and Risks
A reverse mortgage can offer several benefits:
- Giving you access to cash without affecting your Social Security or Medicare benefits
- Allowing you to stay in your home and retain the title
- Having no monthly payments or credit score requirements
- Providing you with flexible payment options and terms
Reverse mortgages also have some risks and costs:
- Reducing your home equity and the inheritance for your heirs
- Charging you fees and interest that can add up over time
- Requiring you to pay for the loan origination, appraisal, closing costs, mortgage insurance, and servicing fees
- Imposing penalties if you fail to meet the loan obligations, such as paying the taxes and insurance, or maintaining the home
- Limiting your options to move or sell your home in the future
- Possibly affecting your eligibility for other programs or benefits
So as you can see, reverse mortgages aren’t suitable for everyone. Please weigh the pros and cons carefully and beware of the scams and frauds that target seniors interested in reverse mortgages. You should definitely compare different lenders and products, and be sure to talk to a trusted financial advisor.
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So there you have it. Reverse mortgages are a significant financial tool for retirees seeking additional income. However, they aren’t the best option for everyone. Talking to a professional financial advisor can help you make an informed choice tailored to your individual circumstances.
By Steven Roberts
