What is a Reverse Mortgage and How Does it Work?

For seniors living on a fixed income and in need of some financial help, a reverse mortgage can be a great option. Available to homeowners over the age of 62, this type of loan allows those with considerable equity to borrow against the value of their home.

How does a reverse mortgage work?

Basically, the lender pays money to the homeowner instead of the homeowner paying money to the lender. Payments can be received as one lump sum, fixed monthly payments, or as a line of credit. These payments are usually tax-free and are not required to be paid back until the home is later sold. As the homeowner receives payments from their reverse mortgage, interest is accumulated and rolled back into the loan balance. When the homeowner dies or sells the home, proceeds are used to pay back principal, interest, insurance, and fees.

With this type of loan, the amount owed goes up over time. Why? It’s because the interest and fees are added throughout its duration. As the loan balance increases, home equity decreases. Interest and fees can add up quickly, so be careful!

Even though the homeowner doesn’t have to make monthly payments, a reverse mortgage is still a loan. As such, it comes with responsibilities. Property taxes and insurance must still be paid. If not kept current, the loan can come due. Also, since the home is sold for loan repayment, it will still need to be regularly maintained. This means that if you’re living in a long-term care facility, your family may need to assist you.

What are the benefits?

If you’re a senior who needs help paying monthly bills or funding long-term care, a reverse mortgage can provide that assistance. A person does not need a good line of credit to qualify and won’t have to make monthly loan payments, so it’s a favorable option for some quick cash.

A reverse mortgage is one of the only ways to access home equity without first selling a property. This makes reverse mortgages an enticing option for seniors who do not qualify for a home equity loan or cannot make monthly payments.

Some other pros of a reverse mortgage include:

• Better management of finances. A reverse mortgage can help supplement your post-retirement income without you having to break open your nest egg. No monthly payments can also leave a little more wiggle room in your monthly budget.
• You can age in place. Guess what? If aging in place is your goal, then a reverse mortgage can help you achieve that! Done properly, it can prevent you from selling your home and can even cost a little less in the long run.
• No taxes on the income. Taxes is a word that makes most of us rankle. However, the money you receive isn’t taxable per the IRS. However, it’s important to note that it might be considered income by other agencies.
• You’re protected if the balance exceeds your home’s value. A reverse mortgage balance grows over time, so it’s possible that what you owe may someday exceed your home’s value. Fortunately, the amount of debt that you have to repay can never exceed the property’s total value. This means that the lender can’t make claims against your assets!

What are the drawbacks?

Like anything else, reverse mortgages come with a few cons, as well. Some lenders aren’t always upfront about the potential drawbacks of this type of mortgage, so it’s important to always exercise caution and make sure you understand why a reverse mortgage might not be the right choice for you. With that said, some of the cons of reverse mortgage include:

• You have to pay fees. Sadly, reverse mortgages may not incur taxes, but they aren’t free. Some of the fees you might have to pay include:
  • Monthly servicing fee up to $35
  • Mortgage insurance premiums (MIP)
  • Origination fee (capped at $6,000 for HECMs)
  • Closing costs from third-party lenders
• The interest cannot be deducted until you repay. Mortgage interest is usually tax-deductible. However, that isn’t the case when it comes to reverse mortgages. You can only enjoy this perk after the loan is paid in full.
• It might affect your eligibility for Medicaid or SSI (Supplemental Security Income). Reverse mortgages are considered assets. Because asset-level limits are crucial to these programs, a reverse mortgage could potentially jeopardize one’s eligibility for these government assistance programs.
• You still have other home expenses. Let’s face it–home ownership is expensive! Sadly, just because reverse mortgages can help you manage your budget more efficiently, you’ll still have to pay other home-related fees, such as property taxes or HOA fees.
• It may cause issues for your heirs. After you (the borrower) move out from your home, your reverse mortgage loan must either be paid in full or the home is surrendered to the lender. While this scenario can occur with death, it can also be triggered by a move to a nursing home or other long-term care facility. Understandably, this can cause a lot of issues for heirs or non-borrowers who are still residents of the home.

How do I find a lender?

Though it has plenty of advantages, taking out a reverse mortgage can be expensive. The accumulation of interest and fees over time quickly adds up and can leave heirs to a home in a difficult situation. Reverse mortgages can be great for the borrower; however, they can put the heir in a difficult financial situation if the homeowner fails to inform them of the loan. It is important to shop around with various lenders before deciding. Also, consult with a financial advisor. Bob Carlson’s Retirement Watch is a great place to start your research! Here are a few other reputable options that you can explore.

All Reverse Mortgage

This Better Business Bureau Torch Ethics Awards finalist is ready to work with you. All Reverse Mortgage boasts a wide range of options and one of the lowest interest rates of any HECM lender. Their site is both user-friendly and informative, with an easy-to-navigate menu that will direct you exactly where you need to go—including a FREE reverse mortgage calculator and reverse mortgage counseling locator.

Pros:

• An A+ rating from the Better Business Bureau
• Lower interest rates
• Veteran-led organization

Cons:

• Not available in all states

American Advisors Group (AAG)

• Since 2004, American Advisors Group has been helping seniors secure reverse mortgages. Boasting both experience and credibility, this National Reverse Mortgage Lenders Association member has several physical offices across several states. Of course, an online calculator and one-of-a-kind customer service experience are also available on their website.
• Pros:
• Nationwide availability
• 97% customer satisfaction rate
• Quick turnaround time
• Cons:
• Servicing fees associated with administrative tasks can add up quickly

Fairway Independent Mortgage

If you’re looking for convenience, Fairway Independent Mortgage might be the best choice for you. With a wide array of mortgage calculators and remote loan servicing, their website and mobile app make it easy to get the reverse mortgage you deserve.

Pros:

• Multiple physical locations across most states, except Alaska and West Virginia
• Comprehensive customer service

Cons:

• May charge servicing fees

Mutual of Omaha Mortgage

Mutual of Omaha Mortgage may be a convenient, trusted option for many older adults. Loans can be completed over the phone or on their website. They also boast several flexible repayment plans, 24/7 customer service, and a free reverse mortgage calculator.

Pros:

• Free reverse mortgage guide available on website
• 24/7 availability

Cons:

• Charges monthly servicing fees
• Only available in 48 states

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