The Truth About Reverse Mortgages: Weighing the Costs and Benefits
If you are 65 or older and have watched your retirement income dwindle, a reverse mortgage may seem appealing. Essentially, a reverse mortgage is a loan based on the equity value of your home. You don’t have to repay the loan as long as you live in the home.
With a reverse mortgage, you can do anything you want with the money – take a trip, pay off your creditors, use it as a cushion for unforeseen expenses, pay off an existing mortgage – without any restrictions. You can receive your money in a variety of ways: either as a lump sum, or a regular monthly payment, or even as a credit line that lets you decide when and how much you want to use.
You still own your home as long as you live in it. Unlike a regular mortgage, you make no monthly payments, and the only requirements are that you pay homeowners’ insurance and tax bills on time, and keep the property in good repair.
Think Twice Before Committing to a Reverse Mortgage
If you're starting to think that this sounds too good to be true, be aware that reverse mortgages should be approached with caution. They are complex and different from other types of loans. Consumer advocates worry that vulnerable seniors don’t fully understand the risks involved and are easy targets for aggressive sales tactics. Some sales pitches have labeled these mortgages as a government benefit or as income for life that never needs to be repaid, or they claim the mortgages cost relatively little and carry no risk.
None of these claims is true. Reverse mortgages are not government benefits. In fact, the government insures the lender, not the borrower, against risk. Most reverse mortgages are expensive and come with high origination costs as well as insurance and servicing charges. And, indeed, the loan must be repaid when the homeowner dies or the house is sold. The amount of repayment is the current equity value of the property.
Consumer groups concerned about the potential for abuse caution potential borrowers to be sure they fully understand these complex mortgages. To do this, they should take full advantage of the independent counseling services lenders are required, by law, to provide borrowers.
Consumer advocates also suggest potential borrowers ask themselves certain questions: is a reverse mortgage necessary; what would you do with the money; would a home equity loan or a home equity line of credit serve the same purpose at less cost; is it wise to take a reverse mortgage now when the home equity may be needed later for an emergency or to cover health care costs; would it make more sense to sell the home now and move somewhere less expensive?
They also advise senior citizens who want to join the approximately 600,000 Americans who have already taken out reverse mortgages to check with the Better Business Bureau and/or the National Reverse Mortgage Lenders Association before selecting a lender. If you do decide to take a reverse mortgage, they say, it is wise to be sure you are dealing with a reliable and reputable lender.