Our mortgage experts are often asked about reverse mortgages, many times by folks who are interested in finding an extra source of income, but may have some concerns, and would like some straight-forward information before inquiring further. We've put together the pros, cons and hows of this increasingly common financial product in one place to make the learning process a bit easier.
Basic Facts About Reverse Mortgages
- Reverse mortgages are loans
- At least one of the borrowers needs to be age 62 or above
- Those who take a reverse mortgage are borrowing against their home equity
- Reverse mortgages do not need to be repaid as long as one of the borrowers lives in the house
- Reverse mortgages usually eliminate any other ongoing mortgage payments
- Borrowers can choose to receive a monthly payment, lump sum, or line of credit to use against the house (or even a combination thereof)
- Reverse mortgages can be a welcome source of financial independence
- It's essential to do your homework before committing. We recommend arranging a consultation with one or more lender consultants
As the name implies, a reverse mortgage is very much like a traditional mortgage, just in reverse. In a traditional mortgage, the bank hands over a large sum of money upfront so that the borrower can use it to buy a house. That borrower then pays it down over time by making monthly payments.
By contrast, with the most common forms of reverse mortgage, the borrower already has a house, which is usually all or mostly paid off. If they choose the monthly payment option, they receive fixed monthly payments from the bank that they can use on anything they like, and the amount owed to the bank grows over time as the borrower receives their monthly checks. The amount borrowed is only repaid in the event the borrower and their co-borrower (spouse) moves out of the home. This is a critical, and often misunderstood feature of these loans.
How To Determine If A Reverse Mortgage Is Right For You?
Like all financial products, reverse mortgages have pros and cons. Additionally, those who educate themselves can ensure that they maximize the pros while minimizing potential downsides. Here are some of the factors we recommend folks consider:
- What is your need for supplemental income?
- Do you need to eliminate your current mortgage payment?
- Do you need financial independence?
- Are you planning on staying in your home for the long term?
- Your desire to maximize the estate you leave to heirs
- Finally: make sure you're only talking to reputable, FHA regulated lenders. This will ensure you benefit from a slew of regulations protecting borrowers and features subsidized by the federal government
Additionally, if you do decide to start looking into loans, we recommend people secure multiple offers, then evaluate each of them along fairly typical lines:
- What is the interest rate being quoted? (the lower the better obviously)
- How much total money is the lender offering and over what time period?
- Are there any upfront fees or other charges?
- Have you maximized your chances of getting the best deal by evaluating multiple offers?
What Are The Main Motivations For Those Who Do Get Reverse Mortgages?
LendingTree has connected thousands of people with reverse mortgage lenders, often helping them to get a significantly better offer than they would have gotten on their own, simply by forcing banks to compete against one another. Generally, of the thousands we've helped, those who opt for a reverse mortgage are looking to:
- Stop paying their existing mortgage payment for the rest of the time they or their spouse lives in their home
- Receive a supplemental income stream in the form of a monthly income distribution
- Guarantee that their current mortgage will never cause them to be foreclosed on or forced from their home
- Increasingly common: clever folks have started using reverse mortgages to buy their next home when they move, often following retirement. This means they put a certain amount down when they purchase the home, but then never have to make another mortgage payment as long as they live in the new house. This can really help remove some of the uncertainty around paying for increasingly long retirement years.
Disadvantages of Reverse Mortgages
Like any substantial financial decision, we strongly advise those considering a reverse mortgage to evaluate every angle, especially potential drawbacks. The most important things to consider are:
- The Mortgage Accumulates Interest: While those who take out a reverse mortgage are not required to make any payments on the loan while they live in their home, interest does accrue on the balance as it builds. Eventually this interest will be paid back once the borrowers leave the home. Sometimes this occurs as a simple repayment from other funds, but often the home is sold once it is no longer being used in order to repay the loan and the interest.
One critical item to note: no matter how long the loan is outstanding, and no matter how much interest is built up, the amount owed will never be more than the value of the home. This is by design so that the debt won't be passed along to the borrower's heirs. Also, there is never any obligation to sell the home. The loan can always be repaid in full and the home kept.
- The Loan Amount Offered Is Less Than Expected: The loan amount offered by a bank is determined by many factors, including the appraised value of your home, the amount of money, if any, you may owe on an existing mortgage, your age, the bank's profit margin and the current interest rate environment.
Due to the fact that each bank has different underwriting goals and abilities, we cannot stress enough how critical it is to compare offers from multiple lenders before making any decisions. We also recommend being open about the fact that you are entertaining multiple offers when you speak with the banks. This will encourage them to sharpen their pencils and make a better offer right off the bat.
At the end of the day, the only way to really determine if a reverse mortgage is right for you is to get into the details of specific offers and to understand the available options. Even if it's just to arm yourself with more information, or to know what you could get should you ever need it, having the offers in your back-pocket can be a great source of financial peace.