Sunday, February 11, 2024 / by Richard Eimers
Reverse mortgages allow homeowners to borrow money based on their home’s value, but there are many considerations when choosing one.
NEW YORK – As long as there have been homes for sale, there have been financial vehicles designed to alleviate some of the financial pressures associated with owning a home.
Older adults with their home paid off are being courted by businesses promoting reverse mortgages. Often the concept is introduced in television commercials with celebrity endorsers such as Tom Selleck and Henry Winkler.
A reverse mortgage is another way homeowners can borrow money based on the value of their homes, but it doesn't need to be repaid as long as those individuals are still living in their residences.
Eligibility and basics
The Federal Trade Commission's consumer advice says a reverse mortgage is an option for those age 62 or older who can borrow money based on their equity, or how much money one could get for the home if sold after what is owed on the mortgage is paid off. At least one owner must live in the house most of the year. Reverse mortgages may be paid as a cash lump sum, as a monthly income or as a line of credit that enables the homeowner to decide how much is desired and when.
There is a misconception that a loan that requires no monthly repayment of principal or interest will not come with any eligibility considerations. Premier Reverse Mortgage says there are some things to know before doing reverse mortgages. To prevent homeowners using reverse mortgages to avoid downsizing due to financial shortcomings, certain eligibility parameters must be met, including a credit history analysis, income requirements, age requirement and property stipulations. These criteria may differ from lender to lender.
How repayment works
Unlike a traditional mortgage where payments are made to principal and interest and the balance goes down over time, with a reverse mortgage, borrowers do not make any payments right away. The loan balance goes up over time and the loan is repaid when the borrower no longer lives in the home. The homeowners or their heirs will eventually have to pay back the loan, usually by selling the home. However, as the loan balance increases, the home equity decreases with a reverse mortgage. This can affect a surviving spouse or other family members. The FTC advises homeowners to confirm the reverse mortgage has a "non-recourse" clause, which means that the borrower or the borrower's estate cannot owe more than the value of the home when the loan becomes due and the home is sold.
Due to fees and other requirements, a reverse mortgage may be a more expensive way to borrow money. Other ways to borrow against equity may be a better fit, such as a home equity line of credit. Furthermore, since reverse mortgages are for older adults, scams are prevalent. Some include contractors who approach seniors about getting a reverse mortgage to pay for repairs or scams targeting veterans.
Borrowers considering reverse mortgages should first speak with a qualified financial planner. Homeowners in the United States can access information through the Consumer Financial Protection Bureau or consulting the Better Business Bureau.
All options, costs and interest rate information should be confirmed before signing on the dotted line.