A reverse mortgage is essentially a loan against your home that you don’t have to pay back for as long as you live there. It allows homeowners age 62 or older to borrow cash from the equity in their homes without having to make monthly payments. A reverse mortgage is often advertised as a great source of easy money for older homeowners to supplement their income, pay healthcare expenses or use the money as they please. But, as federal bank regulators warn, while there are potential benefits to a reverse mortgage, it may not be the best option for everyone. With the number of potential borrowers growing with the aging population, it’s important that homeowners fully understand the risks and costs involved. Here are four tips:
1) Remember that a reverse mortgage is a loan that must be repaid. “Not all advertisements clearly indicate that a reverse mortgage is a loan,” said Mira Marshall, an FDIC Section Chief specializing in consumer issues. “In fact, a reverse mortgage is a very complicated loan that uses home equity as collateral, just like the mortgage you probably used to purchase your home.” Reverse mortgages allow homeowners to receive cash in a lump sum, through monthly payments, as a line of credit whenever they need money, or any combination of these options. Unlike traditional mortgage products, homeowners do not make any monthly payments to the lender. However, they eventually do have to repay the principal and interest when they move, sell the house or pass away. And, because no monthly payments are being made, the amount owed will grow over time as interest costs build up and, in some cases, as additional funds are advanced.
The borrower also is still responsible for paying the property taxes and insurance and maintaining the house. Failure to do so can cause the reverse mortgage to become immediately due and payable in full. The rules to determine how much you can borrow through a reverse mortgage are complex. For example, the total amount of cash available is a percentage of the home’s value that will vary by the age of the borrower and the location of the property. And if there’s a co-borrower, the value is determined by the age of the youngest borrower. Let’s say your house has a market value of $250,000, you owe nothing on a mortgage and the youngest co-owner is 70 years old. Even though your home equity is about $250,000, with a reverse mortgage and depending on the location of the property, you can borrow only up to approximately $130,000. In contrast, with a traditional home equity loan, it may be possible to borrow up to 100 percent of the value of the home.