A reverse mortgage helps homeowners 62 or older use their home equity in retirement planning. Is a reverse mortgage too good to be true?
A reverse mortgage enables you to convert part of your home equity into cash. The only reverse mortgage insured by the U.S. Federal Government (HUD) is called a Home Equity Conversion Mortgage or HECM, and is available through an FHA approved lender.
Here is what you need to know when deciding whether a reverse mortgage is right for you.
Reverse mortgages are remarkable because you do not make monthly payments to the lender, which is unlike a traditional mortgage where you repay funds on a monthly basis.
Receiving a lump sum that you do not repay might be a difficult concept to grasp. As a result, you may feel a reverse mortgage is too good of an opportunity to be true. But a reverse mortgage is not free money. Although you are not required to make monthly payments, while living in your home, payments are required once the last surviving borrower dies, sells the home or moves out of the property. So the bank eventually receives repayment, but oftentimes the loan is repaid by your estate.
Unfortunately, there are mortgage scams involving reverse mortgages. Some con artists have tricked seniors with bogus investment opportunities.
The good news is that these scams are less common today. In recent years, the FHA has introduced new consumer protection requirements to look out for your best interest. This includes offering counseling and education to ensure you understand how a reverse mortgage works. You are also required to undergo a financial assessment which helps the lender determine whether you can afford ongoing costs associated with the home, such as taxes, insurance and other obligatory expenses. If you do not have enough resources for required taxes and insurance monthly payments, you must set aside a percentage of your reverse mortgage proceeds to cover these obligations. These protections exist to lower the risk of foreclosure in the absence of tax and insurance payments.
A common fear is that a reverse mortgage will give a mortgage lender ownership of a property. This is not the case. With a reverse mortgage, the lender places a lien against the property, but you remain the owner. On that account, your name also remains on the title. As long as you pay your taxes, insurance and maintain the property, you do not have to worry about the lender taking your home.
Another misconception is that a reverse mortgage is only for seniors who experience financial hardship. While it is true that funds from a reverse mortgage can go toward household bills or pay off debt, these are not the only uses for funds.
Less income in retirement can influence home improvement decisions or make it harder to care for basic needs and wants. You may not be cash-strapped, but less expendable income could interfere with your ability to enjoy life to the fullest. A reverse mortgage can function as another retirement financial planning tool. And with this tool in place, you might avoid a significant change in lifestyle.
A reverse mortgage could also be the answer to delaying Social Security benefits until the age of 70, resulting in a higher monthly benefit. There is the option of using a reverse mortgage to pay off an existing mortgage, which is beneficial if you do not want a mortgage in your retirement years. A reverse mortgage can also go toward increasing your emergency cash reserve. A reverse mortgage may be a beneficial option regardless of your net worth.