A reverse mortgage is a useful tool for helping senior citizens remain in their homes and maintain their lifestyle.
A reverse mortgage is a ripoff, a scam. Don’t fall for it or you might lose your house!
So which is it, a blessing or a trap? As with most financial products, the answer is, “It depends.” For some clients, it is just the opportunity they need for financial stability, but for others, it can be a danger. No one solution is right for everyone, as we all know.
Most of us in the financial planning field are familiar with the basics of a reverse mortgage. It is a means by which older homeowners (62 or over) can make use of the equity in their home without having to make payments on a loan. The amount a person can access depends on the value of the home, the age of the homeowner and interest rates. The money can be taken as a lump sum, monthly payments, or a line of credit. Nothing needs to be paid back until the home ceases to be the primary residence, either due to death or to the homeowner moving, perhaps to a nursing home.
Along with the age restriction, there are a few other conditions. Besides a single family home, a 2-4 unit building also qualifies, as long as the owner occupies one of the units. The home generally must be owned free and clear, although if there is a low mortgage balance it can be paid off with proceeds from the reverse mortgage. A financial assessment should be done to assure that the homeowner will have the means to keep paying property taxes, insurance, and maintenance.
Most current reverse mortgages are FHA-insured Home Equity Conversion Mortgages (HECM). There is a maximum amount a person can borrow under this program, currently $625,500. The owner of a higher-valued home might consider a proprietary reverse mortgage through a private lender. These are not subject to the HECM loan limits.
Under certain circumstances, a reverse mortgage can be the perfect instrument to address a senior’s needs. A lump sum can be used to make necessary home repairs or adaptations for an elder. A monthly stream of income might be the difference between an active or restricted lifestyle. Perhaps a line of credit can be tapped for a special vacation or a new vehicle.
A reverse mortgage is not the solution for everyone, however. In some cases, the homeowner might be better off downsizing, or moving to an assisted living facility. Some people might take a lump sum, only to squander it and be left with no equity and no cash. Unexpected expenses may deplete resources needed to pay property taxes, insurance, etc. And there may be no value left for heirs. If the heirs don’t have the means to pay back the mortgage themselves, they will have to sell the home. Fortunately, there is usually a “non-recourse” clause in the agreement so that if the value of the home is less than what is owed, the heirs don’t have to make up the difference.
Reverse mortgages come with significant fees and closing costs, so it’s worthwhile to shop around. However, the client must beware of salespeople who try to pressure them into a hurried agreement or sell them other products to invest the proceeds. There are always shady operators out there, and the best course of action for a client is to consult with a financial planner and consider all options before making a decision.