Reverse mortgages are a type of loan available to the elderly to help assist with expenses. In order to be eligible, you must be:
- At least 62 years of age (this generally applies to all individuals on the deed of title);
- Own a home that is your primary residence;
- Have the reverse mortgage be the primary real estate lien on your home;
Traditionally, reverse mortgages are meant for retired individuals on a fixed income to cover their living expenses by using equity from their homes. The money can be used to pay for any expense, and is most commonly used to pay for medical treatment, buy long-term care insurance, finance home improvements or supplement income.
Reverse mortgages are typically ideal for "house-rich-but-cash-poor" homeowners. These mortgages allow individuals to stay in their houses while still maintaining financial stability. To qualify, the homeowner must have paid off all or the majority of their home mortgage. This gives the person a significant amount of equity in the home to essentially borrow against when the reverse mortgage goes into effect.
A reverse mortgage works by allowing an individual to convert the equity in their homes to cash while retaining their home ownership. Rather than making monthly payments to a lender, under a reverse mortgage the homeowner gets money from the lender every month. This differs from a traditional mortgage where the borrower pays the lender a monthly amount to remain in the home.
The homeowner is not obligated to repay the money for as long as they live in the home. In exchange, the lender will hold onto some, most or all of the individual’s home's equity. After the home is sold or vacated, the borrower will have to start paying back the loan.
However, it is important to know that the homeowner is still responsible for other payments like taxes and insurance during this time. If the property is under a homeowners association, the individual will also be responsible for paying those dues.
There are different types of reverse mortgages that an individual can apply for — these are distinguished by the source of the loan. This includes the following loan types:
- Single-Purpose Reverse Mortgages: State and/or local government agencies often offer these mortgages.
- Home Equity Conversion Mortgage (HECM): These types of federally-insured mortgages are generally administered by the Department of Housing and Urban Development (HUD).
- Proprietary Reverse Mortgages: Banks, mortgage companies and other private lenders offer these types of mortgages.
For all reverse mortgages, the individual is not generally not required to disclose their income or provide any medical data in order to qualify for the loan. However, they may have to undergo some sort of mortgage counseling before getting approved. The amount that can be borrowed is calculated based on the person’s age, the house's equity, the house's value and the available interest rate.
Although a reverse mortgage has many benefits, homeowners must be aware of the negatives associated with these mortgages before moving forward. The cons associated with obtaining a reverse mortgage include the following issues:
- Reverse mortgages can often be more expensive than traditional loans;
- The interest on reverse mortgages is generally not deductible until you pay off the loan in part or in full;
- The equity in your home may be partially or fully used up by a reverse mortgage, thus leaving you with little or no equity;
- There have been reported cases of lender abuse when dealing with reverse mortgages;
- As a homeowner, you may still be responsible for paying taxes, fuel, insurance, maintenance and other expenses. While this should usually be a given, some people may not realize this and be blindsighted after getting the loan; and
- You can be charged origination fees, closing costs or even servicing fees by lenders for reverse mortgages.
Additionally, if the borrower dies and the loan is still attached to the property, the person's estate or legal heirs will have to satisfy the debt. This can generally be accomplished by paying off the loan in full or paying 95% of the home’s property value.
While your state may not require that you have a real estate lawyer help you with the reverse mortgage process, hiring one has many benefits. An experienced lawyer can help you decide whether a reverse mortgage is ideal for you, evaluate your financial situation, and discuss the pros and cons of moving forward with the loan. If you decide to move forward with a reverse mortgage, a lawyer can also assist you with the necessary paperwork and make sure everything gets done properly and legally.
Additionally, if you suspect that your lender has violated the law during your loan process, you can hire a lawyer to explore your legal options. This can include filing a complaint with your lender, the state Attorney General's office or the Federal Trade Commission (FTC).