Separating myth from reality in the reverse mortgage world
Reverse mortgage facts
- Reverse mortgages help seniors tap their home equity and stay in their houses.
- Borrowers must continue to pay taxes and carry hazard insurance.
- Reverse mortgage borrowers do not sell their homes to the bank.
- In many cases, surviving spouses can remain in the home.
Reverse mortgages are among the most misunderstood loans. They are a different animal.
A regular, “forward” mortgage, like a 30-year fixed-rate loan or a shorter-term home equity loan, is fairly easy to understand. A borrower takes out a loan backed by the value of the home or the built-up equity, and makes regular payments over a fixed period until the loan is paid off. This is a pretty simple idea.
A reverse mortgage, which is also known as a home equity conversion mortgage (HECM), runs in the opposite direction, and it takes a bit of work to puzzle them out. Reverse mortgages were invented so that older Americans, 62 or older, could tap the equity in their homes to supplement their retirement income and live in their homes for the rest of their lives.
Reverse mortgage basics
Reverse mortgages are loans. Borrowers are charged financing fees and interest, but that’s where the similarities with the forward loan end.
The borrower and surviving spouse typically make no payments as the initial fees are commonly taken out of the loan. The borrowers are then paid the proceeds of the loan over time or in a lump sum.
The loan amount is determined by the amount of equity that has accumulated in the home, and the age of the borrower.
The borrower can receive the proceeds in a number of ways depending on how the loan is structured. If the interest is adjustable, the payments can come in regular installments, or be drawn on as a line of credit. The loan also can be set up as a flexible line of credit together with set monthly payments to the borrower. If the reverse mortgage has a fixed rate, the payment comes to the borrower in a lump sum.
Myths about reverse mortgages
Almost all reverse mortgages are backed by the Federal Housing Administration (FHA), which establishes the guidelines for eligibility. A borrower will typically obtain a reverse mortgage through an FHA-approved lender. FHA charges an upfront and annual mortgage fee that guarantees that the homeowner will receive the payments.
Because reverse mortgages are complicated and the details easily confused, FHA requires that potential borrowers meet with a HECM counselor to explain the risks.
There several myths about reverse mortgages, and following are some of the biggest ones.
1. It's selling the home to the bank
Reverse mortgages are loans. The loans come due after the death of the borrower and eligible surviving spouse, or if the borrower or eligible surviving spouse moves out of the home for 12 consecutive months. Once the loan comes due, the estate typically pays off the principal amount and accrued interest through the sale of the house. The estate will receive any monies left over from the sale.
2. The surviving spouse will be forced out
For newly originated reverse loans, this is no longer really an issue. Federal government policy now states that for FHA-backed reverse mortgages issued on or after Aug. 4, 2014, the nonborrowing spouse may remain in the home after the HECM borrower dies so long as the borrowers follow eligibility guidelines set down by the program. More recently, the government established new policies that make it possible for surviving spouses to remain in their homes in cases where loans were originated before Aug. 4, 2014.
3. The borrower can never be foreclosed on
A reverse mortgage only guarantees that a borrower and spouse can stay in the home for life if they meet their obligations. They still must pay property taxes, keep flood and hazard insurance and maintain the property to an acceptable standard.
Tragically, some elderly Americans can’t afford to pay these bills when they get smacked by other major expenses, like an unexpected medical emergency, and have tapped out their home equity too quickly. That’s why it is important for the borrower to plot their financial course carefully before entering into a reverse mortgage.