Should Seniors Consider a Reverse Mortgage Now?
Jim Miller, the creator of Savvy Senior, a syndicated information column for older Americans and their families, explains reverse mortgages and why you may or may not want to consider one right now.
Dear Savvy Senior,
What can you tell me about reverse mortgages? The coronavirus damage to my retirement account has me considering it but want to make sure I know what I’m getting into.
Massive job losses, a volatile stock market, and low interest rates caused by the coronavirus pandemic have caused many cash-strapped retirees to consider a reverse mortgage. But there’s a lot to consider to be sure it’s a good option for you now.
Let’s start with the basics.
A reverse mortgage is a unique type of loan that allows older homeowners to borrow money against the equity in their house (or condo) that doesn’t have to be repaid until the homeowner dies, sells the house, or moves out for at least 12 months. At that point, you or your heirs will have to pay back the loan plus accrued interest and fees, but you will never owe more than the value of your home.
It’s also important to understand that with a reverse mortgage, you, not the bank, own the house, so you’re still required to pay your property taxes and homeowners insurance. Not paying them can result in foreclosure.
To be eligible, you must be 62 years of age or older, own your own home (or owe only a small balance) and currently be living there.
You will also need to undergo a financial assessment to determine whether you can afford to continue paying your property taxes and insurance. Depending on your financial situation, you may be required to put part of your loan into an escrow account to pay future bills. If the financial assessment finds that you cannot pay your insurance and taxes and have enough cash left to live on, you’ll be denied.
Reverse Mortgage Loan Details
Around 95 percent of all reverse mortgages offered are Home Equity Conversion Mortgages (HECM), which are FHA insured and offered through private mortgage lenders and banks. HECM’s also have home value limits that vary by county but cannot exceed $765,600.
How much you can actually get through a reverse mortgage depends on your age (the older you are the more you can get), your home’s value, and the prevailing interest rates. Generally, most people can borrow somewhere between 50 and 60 percent of the home’s value. To estimate how much you can borrow, use the reverse mortgage calculator at ReverseMortgage.org.
To receive your money, you can opt for a lump sum, a line of credit, regular monthly checks, or a combination of these.
But be aware that reverse mortgages aren’t cheap. HECM loans require a 2 percent upfront mortgage insurance payment, plus an additional 0.5 percent annual charge, on top of origination costs and lenders’ fees. Any amount you borrow, including these fees and insurance, accrues interest, which means your debt grows over time.
Also note that because reverse mortgages are complex loans, all borrowers are required to get counseling through a HUD-approved independent counseling agency before taking one out. Most agencies charge between $125 and $250. To locate one near you, visit Go.usa.gov/v2H, or call 800-569-4287.
If you have a short-term need for cash, there are other options you should look into. For example, many low-income seniors don’t realize they qualify for the earned income tax credit, a refundable tax break that can put cash in your pocket. You also could use BenefitsCheckUp.org to search for financial assistance programs you may be eligible for.
Another possibility is a regular home equity loan or line of credit. This type of borrowing requires you to make payments, and lenders can freeze or lower limits on lines of credit, but the borrowing costs are much lower.
Send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070, or visit SavvySenior.org.
Jim MillerContributing Writer
Jim Miller is the creator of Savvy Senior, a syndicated information column for older Americans and their families that is published in more than 300 U.S. newspapers and magazines. Jim is also a contributor to NBC’s “Today” show and KFOR-TV in Oklahoma City, and is the author of The Savvy Senior, The Ultimate Guide to Health, Family and Finances for Senior Citizens.
Jim is frequently quoted in articles about issues affecting senior citizens and has been featured in numerous national publications, including Time magazine, USA Today and The New York Times. In addition, he has made multiple appearances on CNBC, CNN, Retirement Living Television and national public television. Read more from Jim Miller.