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Everything You Should Know About Reverse Mortgages
Reverse mortgages are a way for older homeowners to borrow money based on the equity of their home. Here's what you need to know about the possible risks, how reverse mortgages work, how to get the best deal for you, and how to report reverse mortgage fraud.
The way that reverse mortgages work
If you are at least 62 years old, you may be able to get a reverse mortgage. The amount of money you can borrow from a reverse mortgage depends on how much equity you have in your home. (Your equity is the amount of money you could get from selling your home minus how much you still owe on your mortgage.) Even though a reverse mortgage lets you use your home's equity without selling it right away, it can be risky financially:
With a reverse mortgage, your debt can go up and your equity can be used up. Even though the amount depends on how much equity you have, you are still borrowing the money and paying a fee and interest to the lender. Interest is added to your balance every month, so your debt keeps going up (and your equity keeps going down). This can use up a lot of your equity, or even all of it.
If you get a reverse mortgage, it can limit what you can do in the future. Most of the time, you have to pay back a reverse mortgage when you die or move out of the house. You could use up all your equity, so that when you or your estate sell the house in the future, you get nothing. That means you might not have enough money if you want to move to a smaller home, an assisted living facility, or another location to be closer to family.
A reverse mortgage is a way to borrow money that can be expensive. When you borrow money this way, you may have to pay more in fees and other costs than you would with a home equity loan or line of credit.
For the most common types of reverse mortgages, you must be able to:
- be 62 or older
- live in the property, which has to be where you spend most of your time
- have paid off a lot of your mortgage
- have enough money to keep paying taxes, insurance, repairs, and homeowner association fees for the property.
- Attend a counseling session with a counselor who has been approved by the Department of Housing and Urban Development (HUD)
- apply to a lender and get approved
- not owe any money to the government, like unpaid taxes.
Most of the time, the money you get from a reverse mortgage won't affect your Social Security or Medicare benefits and won't be taxed. Most of the time, the loan is paid back by you, your spouse, a co-borrower, or your estate when you die, sell your home, or move out.
How reverse mortgages are different from traditional mortgages, home equity loans, and home equity lines of credit (HELOCS)
With a regular mortgage, you borrow a lump sum of money and make monthly payments to the lender to pay it back. Part of your payment goes toward paying back the amount you borrowed (the principal), and the other part goes toward paying the interest on the loan. Over time, your equity goes up and the amount you owe goes down.
With a reverse mortgage, the lender gives you money based on how much equity you have in your home. The lender can send you the money from the reverse mortgage all at once, in a series of monthly payments, or in some other way. But no matter how you get the money, the lender adds interest to the amount you owe every month (the principal). That means that as time goes on, your balance goes up, making the amount you have to pay go up, and your equity in your home goes down.
Before you decide if a reverse mortgage is right for you, think about the following:
- What could happen to your family if you got a reverse mortgage. Find out if your spouse will be able to stay in the house after you die.
- What your kids will have to pay. Before you agree to a reverse mortgage, make sure it has a "non-recourse" clause. Most reverse mortgages have this clause, which says that you or your estate can't owe more than the home is worth when the loan comes due and the home is sold.
- How long you want to live there. Some costs and fees for reverse mortgages may be higher if you stay in the home for a short time or if you only borrow a small amount of money.
Shopping for a Reverse Mortgage
Take your time
Some salespeople try to move the process along quickly. Before you sign anything, stop and talk to a counselor or someone you trust. A reverse mortgage can be hard to understand, so you shouldn't rush into it. If you feel like you have to close the deal right away, walk away.
Don't give in to pressure to buy more financial products.
Don't think that a salesperson knows what's best for you. Some salespeople might suggest ways to invest the money from your reverse mortgage. They might even try to get you to buy other financial products, like an annuity or long-term care insurance. If you buy these things, the money you get from your reverse mortgage could be lost. To get a reverse mortgage, you don't have to buy any financial products, services, or investments. In fact, it's against the law in some situations to make you buy other things in order to get a reverse mortgage.
Some people who sell home improvement services might suggest a reverse mortgage as an easy way to pay for repairs, especially after a natural disaster. Before you decide to use a reverse mortgage to pay for needed repairs or improvements, shop around for different contractors and reverse mortgage companies. You should also think about other ways to get the money you need, such as home equity loans, home equity lines of credit, or refinancing your current home mortgage. So, you can accurately compare the cost of the work being done as well as the costs and fees you'll pay, even if you get a reverse mortgage. The Consumer Financial Protection Bureau can also tell you what to do if your home was damaged by a natural disaster and you already have a reverse mortgage.
Find out about the different kinds of reverse mortgages
If you are thinking about getting a reverse mortgage, do some research and ask questions. What you want to do with the money could help you decide which type of reverse mortgage is best for you. A counselor can tell you what the differences are between the three types of reverse mortgages.
- Home Equity Conversion Mortgage (HECMs). This is the most common kind of reverse mortgage, and you can use it for anything you want. They are insured by the federal government through HUD, but that doesn't protect the homeowner. It makes sure that the lender will get their money back if you can't pay back the reverse mortgage.
Getting a HECM doesn't usually depend on how much money you make. But when deciding whether to approve and close your loan, lenders have to look at your finances to make sure you can pay back the loan and keep up the house. The lender may want you to save money for things like property taxes, homeowner's insurance, and flood insurance.
HECMs give you bigger loan advances than private loans, but they cost you less overall. Also, a person who takes out a HECM loan can usually stay in a nursing home or other medical facility for up to 12 months without having to pay back the loan.
- Single-Purpose Reverse Mortgages. Single-purpose reverse mortgages are the least expensive type of reverse mortgage. They are offered by some state and local government agencies and nonprofits. You can only use them for what the lender says you can, like for home repairs or property taxes. These loans are available to most homeowners with modest incomes. Find out if there are any low-cost one-time loans in your area that you can get. The people who work at the Area Agency on Aging in your area may know about the programs in your area. Find an Agency for the Aging near you or call 1-800-677-1116. Ask about "loan or grant programs for home repairs or improvements," "property tax deferral" or "property tax postponement" programs, and how to apply for them.
- Proprietary/Private Reverse Mortgages are owned by a private party. These are loans from private lenders, and the interest rate may be higher. If your home is worth a lot and you only owe a small amount on it, you might be able to get more money. But your debt will go up and you might use up your equity. It can be a pricey way to get money, and it can limit your options in the future.
Talk to a housing advisor.
You can find a list of counselors on HUD's website or by calling 1-800-569-4287. Counseling services usually come with a fee, which is usually around $125 but can be more. This fee can come out of the loan you get, and if you can't pay it, you won't be turned down.
If you want a HECM reverse mortgage, you must first meet with a counselor from an independent agency that has been approved by the government. Some lenders who offer reverse mortgages with their own money also require counseling. The counselor must explain how much the HECM costs, what it means financially, and what other options there are to a reverse mortgage (like a home equity loan or line of credit, refinancing your mortgage, or selling your home and downsizing to save money.) Ask them to help you compare the costs of different types of reverse mortgages and to explain how different payment options, fees, and other costs affect the total cost of the loan over time.
Ask a counselor or a lender to explain the Total Annual Loan Cost (TALC) rates. They show how much a reverse mortgage is expected to cost on average each year, broken down into each cost.
Know all the reasons why you might have to pay back the loan sooner than you had planned. For example, you might have to pay off the loan early because you have to leave the house sooner than you thought.
The Consumer Financial Protection Bureau has a list of questions to ask a housing counselor.
- Compare the different lenders' options, terms, and fees. For example, the mortgage insurance premium is usually the same from lender to lender, but most loan costs, such as origination fees, interest rates, closing costs, and servicing fees, are different.
- Check all costs up front. Some reverse mortgages may cost more than regular home loans, especially if you have to pay closing costs and origination fees up front. This is something you should think about if you only plan to live in your home for a short time or if you want to borrow a small amount.
- Find out if the interest rate is fixed or if it will change. Most reverse mortgages have rates that change based on how the market is doing, and each month, interest is added to the amount you still owe. This means that the amount you owe goes up as the interest on your loan grows. Variable-rate reverse mortgages usually give you more choices about how to get your money, but the rate could go up.
Some reverse mortgages, mostly HECMs, have fixed interest rates, but you usually have to take out the whole loan at closing. A fixed rate is usually best if you want to use all of the money from the reverse mortgage at once, like to pay off debt or make big home repairs. Most of the time, the total amount you can borrow is less than what you could get with a loan with a variable interest rate.
Learn As Much As Possible Before Deciding
Whether or not you should get a reverse mortgage is a big question. Think about all your choices. You might be able to get cheaper options. More information can be found at the following places:
Consumer Financial Protection Bureau
Visit the CFPB's reverse mortgage portal to watch an informational video and get two publications, Reverse Mortgages Discussion Guide and Considering a Reverse Mortgage?, that talk about some things to think about if you're thinking about getting a reverse mortgage.
Call 1-855-411-CFPB to talk to someone at the CFPB (1-855-411-2372).
Visit the HECM Program or call 1-800-CALL-FHA (1-800-225-5342); TTY: 1-800-877-8339.
To find a housing counselor who is approved by HUD, you can search on HUD's website by the name or location of a counseling agency, or you can call 1-800-569-4287.
The Right to Cancel
What if you just got a reverse mortgage, but now you don't want it? Most reverse mortgages give you at least three business days after closing to back out without paying a fee. This is called your "right to back out."
- You have three business days to tell the lender in writing (including Saturdays but NOT Sundays or legal public holidays).
- Get a return receipt when you send your letter by certified mail. This will help you keep track of what the lender got and when they got it.
- Keep copies of your letter and the documents that support it, as well as any letters you send and receive from the lender.
After you cancel, the creditor's claim on your home will no longer be valid, and you won't have to pay anything for the credit. The lender has 20 days to give you back any money you paid for the loan and do what needs to be done to stop using your home as collateral. If you got money or property from the creditor, you must offer to give it back after they release your security interest and give you back any money you paid.
Report Possible Fraud
Tell the counselor, lender, or loan servicer if you think it might be a scam or that someone involved might be breaking the law. Then you should tell
ReportFraud.ftc.gov, which is run by the Federal Trade Commission.