The concept of reverse mortgages has always scared me. I used to envision old folks being put out on the street after they had borrowed the full value of their home.
It turns out, as the Center for Retirement Research at Boston College reports, that virtually all reverse mortgages being made today are federally insured Home Equity Conversion Mortgage (HECM) loans. The HECM program is operated by the Federal Housing Administration, part of the Department of Housing and Urban Development, and is designed to prevent the disastrous results I used to imagine.
If a senior needs money to supplement monthly income, to repair a home so that it is suitable for aging in place, or for some other purpose, a reverse mortgage might be something to consider — though there is still plenty to worry about.
An HECM reverse mortgage cannot be called due until the borrower dies or no longer uses the home as a principal residence. The loan can be paid out in a variety of ways — as a line of credit to be used when needed, as a lump sum, in monthly installments for a fixed period, or even as equal monthly payments for as long as the borrower lives or continues to live in the property. Since the loan is federally insured, payouts are guaranteed even if the lender goes out of business. When the borrower dies, the estate has a period of time to pay off the loan, which is usually achieved by selling the house. If the house sells for less than the loan, the estate is not affected. It can’t be tapped to make up the difference.
Still, there are risks and problems. For one thing, the borrower is required to pay all property taxes and home insurance while the loan is in effect, and to keep the property from falling into disrepair. If the owner doesn’t have the money to meet these expenses, she can lose the house.
Second, like all mortgages, the reverse mortgage has an interest rate. In this case, the interest is added to the amount of the loan month by month, so the borrower ends up paying interest on interest. It’s as if the borrower had a reverse savings account, with the amount owed steadily escalating due to the miracle of compound interest. Moreover, the IRS does not regard the interest added into a reverse mortgage as tax deductible. Mortgage insurance is required and adds another !.25 per cent to the monthly interest.
All of this can mean that a homeowner will find the principal he built up in his home over many years dropping significantly. If money is needed later on for some purpose, such as moving into a continuing care retirement community, it may not be available. Nor, of course, will it be there for the heirs when the borrower dies.
The minimum age for taking out a reverse mortgage is 62, and this means that if the borrower’s spouse is younger than that, he or she cannot be a signatory to the loan. When the borrower dies, the spouse risks being evicted when the house is sold. AARP has labored mightily to solve this problem, but it’s still a risk.
So think carefully before taking out a reverse mortgage. Only do it if you’re certain that you are likely to remain in your house until you die. You have alternatives. You might sell your house, for example, and downsize to a smaller place closer to the kids and better equipped for aging in place. If you’re up in years and tiring of cooking and cleaning, perhaps it’s time to think of selling the house and using the proceeds to move to an independent living facility, where all of that is taken care of.
By all means, avoid being talked into taking out a reverse mortgage by a re-modeler or a seller of financial products. Such people may not have your best interests at heart. FHA requires that reverse mortgage applicants visit a qualified HECM counselor before committing. Be sure to level with that person about your needs, plans, and assets — and listen carefully to the advice offered.