Terry’s Columns Reverse Mortgages Explained

Reverse Mortgages Explained

By Terry Savage on April 06, 2024

For seniors who own their own home (fully paid off or with a small remaining mortgage), but need more income, a Reverse Mortgage can be the perfect solution. Or it can be a costly mistake. And you won’t know until you consider all the costs as well as your likely future housing needs.

How Reverse Mortgages Work
• You can withdraw either a lump sum, use a line of credit, or receive monthly payments — tax free — out of the equity you have built up on your home.

• Most important, you can never run out of money or home equity, or be forced out of your home because of those withdrawals – unless you run out of money to pay your property taxes or insurance.

• When you sell your home, or die, the amount you have withdrawn plus interest and fees, is taken out of the proceeds, with the balance going back to you or your heirs. If no equity is left, neither you nor your heirs owe any money.

• The standard home-equity conversion mortgage (HECM) is available to homeowners age 62 or older who have either paid off their mortgage or have a small remaining balance. The RM is first used to pay off the mortgage balance.

• The amount you can receive is determined by your age, the value of your home and current interest rates. The older you are, the more money you get!

• You don’t need a credit check to qualify, and you retain title to your home.

• You remain responsible for property taxes, insurance, and general upkeep of the home. So the RM lender will want to see evidence that you have enough ongoing income to do that.

• You must have independent counseling from an independent, HUD-certified housing counselor before a RM will be granted.

Basically, it’s that simple. Your house will become your piggy bank pension for tax-free withdrawals in your retirement. But there are some other things to think about before taking on a reverse mortgage.

Consider this:
• How long will you really stay in your home? At a minimum, the answer should be 5 years, but better if your time horizon is 10 years. That’s because there are significant fees to set up the RM, which are built into your line of credit. It’s just not worth it if you won’t be able to keep up with rising property taxes and insurance over the long run, or might need assisted living in the near horizon.

• Would you be better off selling your home now, in a rising price environment, and banking the cash – or using it to move into a continuing care community, where your future health needs can be accommodated? It’s a tough call to leave the family home, but better to make that decision while you have flexibility.

• Can you manage the lump sum once you receive it? Almost all RMs these days give a lump sum or line of credit, which you can use it to repair the roof or replace the furnace or maintain your lifestyle. But since very few RMs now offer lifetime monthly payments, you might find yourself forced to move when the line of credit runs out!

Once you’ve thought through the implications for your own future lifestyle, you can begin to compare offerings from various RM lenders. You’ll want a standard FHA Home Equity Conversion Mortgage (HECM), not a product from a private lender that might seem more attractive, but doesn’t have federal guarantees that they’ll be around to pay out on your line of credit.

Comparing Reverse Mortgage Offerings
There are differences in the terms HECM lenders may offer. So it pays to comparison shop.

• Consider the interest rates being charged. Almost every RM these days charges an adjustable rate, pegged to an index of Treasury rates. Some lenders charge a higher “margin” over the index, while some charge lower rates but build in higher fees!

• Compare the Origination Fees. Those fees are capped at $6,000 per mortgage, but many lenders advertise lower or even zero fees to set up your RM. (They are building their profit into the interest rate charged.)

• Compare the total amount of equity they calculate you can withdraw from your home.

You must do your homework in this process, not just fall for the glossy brochure in the mail. Start at www.ReverseMortgage.org, where you can search for a HECM lender in your state and use their online calculator to get a rough idea of how much money you could get in a lump sum or line of credit. They also have a link to HUD-approved independent counselors.

Don’t be deterred by the complexity of the process, or the painful discussions about mortality that underlie this decision. A reverse mortgage can be a helpful solution if done correctly And that’s The Savage Truth.



a personal
finance question