Reverse mortgages can be a tool for older homeowners seeking to bring in extra income. But there is a lot of confusion and fear about these products, their intention, and who should obtain them. Here are some answers to common questions about reverse mortgages.
Why should I (or anyone) consider a reverse mortgage?
A reverse mortgage is a special type of loan for homeowners aged 62+ that lets you convert a portion of the equity in your home into cash. This loan may be useful for someone who expects to live in his/her home for several years, and would like extra money to do so.
Reverse mortgages work best when they are considered as part of a broader financial plan, rather than as a tool for getting quick cash or managing a financial crisis. Therefore, a reverse mortgage is not a fit for everyone, and obtaining counseling is critical.
Our official guide, Use Your Home to Stay at Home©, explains the advantages and disadvantages of reverse mortgages, as well as other resources available to help older homeowners age in place.
What’s the difference between a reverse mortgage and a regular home equity loan?
Unlike a traditional home equity loan (or a second mortgage), you don’t have to repay a reverse mortgage loan until you either no longer live in the home as your principal residence or you fail to meet the obligations of the mortgage, such as paying property taxes, maintaining homeowners’ insurance, and keeping up with home maintenance. At this time, there are also no income requirements for obtaining a reverse mortgage.
There are different types of reverse mortgages with different payment methods, but the most common is the FHA insured Home Equity Conversion Mortgage (HECM). Homeowners can receive their payment (borrowed equity) either as fixed monthly payments, a lump sum payment, a line of credit, or a combination of these.
How much does a reverse mortgage cost?
Just like with a traditional mortgage, there are closing costs associated with a reverse mortgage. These closing costs may include a loan origination fee, appraisal, title search and insurance, surveys, inspections, recording fees, and other fees. Sometimes these costs can be financed into the loan.
The Federal Housing Administration (FHA) also requires borrowers to pay an upfront mortgage insurance premium on some HECM reverse mortgages. Depending on how much you borrow during the first year, this could be sizeable and affect the cost of these loans.
The National Reverse Mortgage Lender Association (NRMLA) has a helpful reverse mortgage calculator to estimate your costs. Fees vary by lender, so if you are considering a reverse mortgage, it is important to shop around.
Are reverse mortgages a scam?
Reverse mortgages themselves are not a scam, but there are unscrupulous people and companies that sometimes use reverse mortgages to exploit consumers. The FBI and U.S. Department of Housing and Urban Development (HUD) urge vigilance when looking at reverse mortgage products.
The FHA maintains a list of legitimate reverse mortgage lenders that offer HECM loans. Check your lender at HUD. It helps to work with a lender who has many years of experience with these loans. Federal law prohibits anyone from requiring you to buy a financial product (e.g., life insurance, long-term care insurance, an annuity) in order to get a reverse mortgage.
To learn more about common scams targeted at seniors, use NCOA’s toolkit, Savvy Saving Seniors®.
Why do I need to get counseling before applying for a reverse mortgage?
The federal government requires that all reverse mortgage borrowers receive counseling before they take out a HECM loan. Counselors are trained and approved by HUD to provide unbiased information and to discuss alternatives to a HECM, the costs associated with the loan, the various products and payment plan options, and much more. The counseling session equips the borrower with the knowledge needed to make an informed choice. There is a fee for this counseling, usually payable at the time of the counseling. In some circumstances, the borrower may pay the fee at the time of the closing, using funds from the reverse mortgage.
You can get counseling through by calling 1-855-899-3778. NCOA has partnered with GreenPath Financial Wellness, a nonprofit HUD-approved housing counseling agency, to provide this service. You can also find a counselor in your area at the HUD HECM Counselor Roster.