Real Estate Insider: 4 Things to Know About Reverse Mortgages

Real estate news and advice for individuals and investors

2) Be aware that not all reverse mortgages carry insurance and other protections from the federal government. The most common type of reverse mortgage — the Home Equity Conversion Mortgage or HECM — is offered as part of a program from the U.S. Department of Housing and Urban Development’s Federal Housing Administration. The FHA has protections for the lender as well as the borrower. In the case of the latter, for example, if the borrower or heirs sell the home to repay the reverse mortgage (instead of keeping the house and repaying the loan otherwise), the total debt will never be greater than the value of the home. 

However, there are several types of reverse mortgages that are not FHA-insured. These are mostly reverse mortgages developed and offered by private companies, nonprofit organizations, and state and local governments. They may not offer the same guarantees and protections as an FHA-insured HECM.

3) Understand the costs and fees, which can be significant. Most reverse mortgages have an origination fee, closing costs and periodic servicing fees. There also is an additional monthly insurance premium for an FHA-insured reverse mortgage. The total amount of fees will depend on the loan product. And while the costs and fees can be added to the reverse mortgage instead of being paid up front, doing so increases the loan balance and incurs interest charges. 

Borrowers also should keep in mind that the more cash they take out and the longer they go without making loan payments, the interest charges and other costs can use up much or all of the equity, leaving fewer and fewer assets for the borrower or heirs. And if you or your heirs want to keep the house instead of selling it, the full loan amount would be due and payable from your own funds, even if it’s more than the value of the property.

”Because the costs and fees can be extremely high,” said Mike Evans, an FDIC Fair Lending Specialist, “most experts generally advise homeowners not to take out a reverse mortgage if they plan to stay in their home less than five years or if they simply need extra money for small expenses.”

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