As house prices have increased, many older Americans may be tempted to tap the equity in their homes with a reverse mortgage, which is a loan that allows homeowners 62 and older to convert a portion of the equity in their homes into cash, as long as the home remains their primary residence. Most reverse mortgages are offered through the Department of Housing and Urban Development and are guaranteed by the Federal Housing Administration (FHA) through a program called Home Equity Conversion Mortgages (HECM).
In addition to the age requirement, to qualify for a loan, you need to own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan and you must live in the home. You also must be able to pay real estate taxes, utilities and hazard and flood insurance premiums.
The amount you can borrow depends on several factors, including the age of the youngest borrower, the current interest rate, the appraised value of your home and whether the rate is fixed or adjustable. The more valuable your home is, the older you are and the lower the interest rate, the more you can borrow. A reverse mortgage can help retirees convert an illiquid asset — a house — into a liquid one that can help supplement retirement income while allowing them to remain in the home.
When the home is sold or no longer used as a primary residence, the cash, interest, and other HECM finance charges must be repaid. All proceeds beyond the amount owed belong to your spouse or estate. This means any remaining equity can be transferred to heirs. No debt is passed along to the estate or heirs.
If all of this sounds too good to be true, it can be, according to reverse mortgage suitability and abuse expert, Sandy Jolley. Sandy’s passion for the topic is a personal one: After her parents saw TV commercials for reverse mortgages, they contacted the company. Soon after, a salesman came to the house and sold them a reverse mortgage, “that was totally unneeded.” At the time, her father was in the last month of his life with terminal cancer and her mother had Alzheimer’s disease, which prompted Sandy and her sister to litigate the matter. “All of these commercials talk about features of the reverse mortgage, but don’t talk about whether or not it benefits the borrower.”
After losing the case, Sandy immersed herself in reverse mortgages, became an expert and now educates others, through her website, Elder Financial Terrorism.com. Like many other financial products, a reverse mortgage can be useful, but Jolley notes that the HUD Certified Counselor or financial salesperson’s role is to inform you of the process and various reverse mortgage programs available to you—and is “not permitted nor qualified to give you any legal and/or financial advice to determine if a reverse mortgage is right or harmful for your circumstance. The Lender has no responsibility or fiduciary duty to the borrower. You are responsible for determining if a reverse mortgage is right for you or will financially harm you over the long term.”
She also noted that while reverse mortgages are part of a federally insured program, “HUD is a big bureaucracy and does not have the structure or system in place to audit, regulate or enforce any consumer protections.”
Sandy recommends that those who are considering a reverse mortgage incorporate it into a comprehensive financial plan. If you and your fiduciary advisor determine that a reverse mortgage meets your needs, go for it. Otherwise, skip it!