You can’t turn back the hands of time. But for borrowers who qualify, you can turn back the terms of your mortgage so that your lender pays you, instead of the other way around – in the form of a reverse mortgage.
A reverse mortgage is a special type of loan for an older homeowner whose mortgage typically is paid in full but who desires to withdraw the equity from the home for extra money to pay for things like home repairs, medical expenses and travel. A reverse mortgage can be a smart choice for seniors eager to reduce their bills and improve their quality of life. In particular, this works for older homeowners who don’t work, don’t want to sell their home and downsize to a smaller or less costly dwelling, or aren’t eligible for a home equity loan or line of credit.
Any homeowner 62 years and older with at least 50 percent equity in his or her home can qualify for a reverse mortgage.
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“Many seniors today have found that their savings and retirement accounts have dwindled with the current economic situation,” says Becky Koontz, a reverse mortgage specialist with Frost Mortgage Banking Group, Albuquerque, N.M. “With the higher cost of gas and food, Social Security checks just don’t stretch far enough for many. Eliminating the monthly mortgage payment can provide significant financial relief and contribute to a higher quality standard of living for many seniors.”
Michael LaCour-Little, director of the Real Estate and Land Use Institute in the Mihaylo College of Business and Economics at California State University, Fullerton, says a reverse mortgage is a worthy, viable option for seniors who wish to remain in their homes – provided they understand the advantages and disadvantages.
“It allows an older homeowner to convert their housing equity into tax-free cash, either a lump sum or payments over time,” LaCour-Little says. “There is no underwriting; the borrower does not need good credit or income; and the loan is not repaid until the homeowner either dies or moves out of the property.”
Additionally, the loan in a reverse mortgage is “nonrecourse” – meaning the lender can only seize the home as collateral if the borrower defaults – and mortgage insurance covers any shortfall if the value of the home is insufficient to cover the outstanding debt.
The biggest drawback of a reverse mortgage is that it can be relatively expensive in terms of closing costs, fees and higher interest rates that typically accompany this loan. There’s also the risk that the balance on the loan will exceed the value of the property – leaving nothing for heirs.
A better alternative for some borrowers may be to sell the home or downsize to a smaller, less expensive home, says Scott Withiam, housing counselor supervisor for the nonprofit American Consumer Credit Counseling in Newton, Mass.
“In the worst-case scenario, a [reverse mortgage] borrower with just enough equity could reduce his or her immediate costs, but in the long run might not have enough income in five years to still maintain the property taxes and homeowner insurance along with the cost of living. In that case, they could lose their home,” Withiam says.
Koontz says 95 percent of all reverse mortgages are government-backed, home equity conversion mortgages. Generally, higher-priced homes will opt for a conventional mortgage because their allowable loan amounts are higher than the FHA, which insures HECM mortgages, allows. Conventional reverse mortgages, however, tend to carry higher fees.
Many of the large banks have pulled out of the reverse mortgage market in recent years. In their place, borrowers can turn to smaller banks and mortgage lenders to apply.
