What Is a Reverse Mortgage and Is It Right for Me?

reverse mortgage documents on a desk surrounded by $100 bills and a calculator

Reverse mortgages have long been marketed to older people who
are “house rich and cash poor.” This kind of loan lets you tap
into your home equity and get a check each month — while
remaining in your house. But what sounds like a great idea, in
theory, is often terrible in reality.

In this article, we’ll look at how reverse mortgages work, the
associated costs and how you can get out of a reverse mortgage if
you change your mind.

Here’s What You Need to Know About Reverse
Mortgages

You often see older celebrities pushing reverse mortgages in TV
commercials. The ads are all pretty similar: spokespeople telling
you how great a financial move a reverse mortgage can be. But
money
expert Clark Howard
disagrees.

“Reverse mortgages have been a source of calls into our show
for at least a couple decades now,” Clark says. “The market has
been dirty forever. You have to be so very careful. I know the ads
that appear with the older actors who have high likeability
ratings, but let me tell you, there are a lot of snakes in the
grass.”

Table of Contents:

What Is a Reverse Mortgage?

A reverse mortgage is a loan where a lender pays you every month
— instead of the other way around — and draws down the equity
in your home over time.

It’s called a reverse mortgage simply because it’s the exact
opposite of having a loan in which you pay a lender every month and
build equity.

Reverse mortgages target people who own their homes free and
clear (or close to it) but need money to live. Traditionally, this
has been senior citizens who aren’t getting enough from Social
Security to meet their monthly bills.

How Does a Reverse Mortgage Work?

There are three common types of reverse mortgages, according to
the Federal
Trade Commission
(FTC).

  1. Single-purpose reverse mortgages
  2. Proprietary reverse mortgages
  3. Home Equity Conversion Mortgages (HECMs)

A single-purpose reverse mortgage lets you use the funds you get
for one purpose and one purpose only — be it home repairs,
improvements or property taxes — which is specified in the loan.
These loans are typically offered by state and local government
agencies as well as some nonprofit organizations. They’re not
available in every state, but most low- and middle-class homeowners
are able to qualify for them.

Proprietary reverse mortgages are the same except they’re
available only through private lenders. They’re usually for
people who own higher value homes.

HECMs are federally-insured reverse mortgages that don’t
usually have any income requirement. They’re backed by the U. S.
Department of Housing and Urban Development.

No matter which kind of reverse mortgage you choose, you either
get a check every month or a one-time lump sum from the lender.

But remember, this is a loan with your house as collateral.

You usually don’t have to pay the money back as long as
you’re living in your home. However, if you die, sell your home
or move out, you or your estate must repay the lender. That usually
means selling the home.

And keep this in mind: While you’re in the house, you’ll
still be responsible for the property taxes, insurance, utilities,
maintenance and everything else that goes along with owning the
home.

How Much Does a Reverse Mortgage Cost?

It depends:

“If you want to do this, you need to shop, shop, shop. Because
not all lenders are created equal,” Clark says. “The fees vary
tremendously from one to another.”


LendingTree
says you should expect to pay a lender fee of
whichever is greater: $2,500 or 2% of the first $200,000 of your
home’s appraised value. If you have an appraised value greater
than that, expect to pay an additional 1% of your home’s value
above $200,000.

Other fees include closing costs, upfront mortgage costs and
loan counseling, according to LendingTree.

Any legit lender will require you to go through independent
third party financial counseling for evaluation to see if a reverse
mortgage is appropriate for you. This is especially true for HECMs
and, to a lesser degree, proprietary reverse mortgages.
Fortunately, the cost of the counseling is nominal: often around
$125.

What Are the Downsides to a Reverse Mortgage?

Reverse mortgages remain a popular lure for cash-strapped
seniors, but what’s good in theory is often terrible in
execution.

First off, they’re packed with fees as noted earlier:

  • Origination fee
  • Closing costs
  • Servicing fees
  • Mortgage insurance premiums on select loans

Meanwhile, if you take the lump sum cash-out option, that can
put you in the crosshairs of sleazy insurance salespeople who’ll
push a series of annuities on unsuspecting seniors.

“This is just an absolute, horrific abuse of trust and of that
senior citizen,” says Clark.

Finally, a reverse mortgage, by its very design, takes part of
your home equity and converts it into payments for you. As you use
up the equity in your home in this way, there’s less to leave to
your heirs. You should be aware of that before you decide.

Can I Cancel a Reverse Mortgage?

You can cancel a reverse mortgage thanks to a cooling-off period
set by law. The FTC says you have three business days to cancel
after you sign the contract.

This process, known as “rescission,” is best accomplished by
putting your notice to cancel into a letter — and then send that
letter to the lender by certified mail, return receipt
requested.

Your letter should document any monies the lender got from you
and when. The FTC advises you to keep copies of all your
correspondence including any enclosures. Upon receipt of the
letter, the lender has 20 days to refund anything you paid as a
finance charge to get the loan going.

What Are the Alternatives to a Reverse Mortgage?

As you can probably tell by now, Clark Howard isn’t keen on
reverse mortgages.

“If you’re talking about a family with younger members of
means, it is generally better to have them financially help out an
aging relative or relatives than to have a broker or salesperson
take advantage of the senior with a reverse mortgage,” Clark
says.

So it’s wise to consider the
alternatives
which include:

  • Selling your home and downsizing
  • Refinancing your home
  • Taking out a HELOC or home equity loan
  • Selling to family

The first one is obvious and really comes down to a personal
choice about whether you’re willing to move or whether you would
prefer to age in place.

Second, if you’re looking to refinance, we have a guide to
walk you through the process
here
.

Third, check out our article on home equity loans and home
equity lines of credit (HELOCs),
here
.

Finally, there’s a rarely used alternative when aging parents
have adult children who are of means. The grown children can
actually lend their parents the money, like a bank reverse
mortgage, but the equity flows to the kids — not to the bank.

National
Family Mortgage
is the only organization we know of that will
draw up and manage one of these so-called “caregiver mortgages”
on your family’s behalf.

Final Thought

Reverse mortgages are advertised heavily on TV and elsewhere
with the promise that they can bring a lot of cash back into your
life. But you’ve got to consider carefully if one is right for
you.

“If you’re short of cash in retirement, a reverse mortgage
may be an option for you — but it’s a last option,” Clark
says. “The time to use it is when you’ve come up with every
other way to pay for monthly expenses and you’re still short of
money.”

Meanwhile, if you have additional questions about reverse
mortgages, reach out to our Consumer
Action Center
.

More Related Stories on Clark.com:

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What Is a Reverse Mortgage and Is It Right for Me?