You may have seen or heard about the reverse mortgage. It is increasingly being considered by seniors as a way to maximize their biggest investment: their home. Mark Hirsch, senior mortgage planner for Midwest Bank Centre, says reverse loans are not just need-based. “It’s not just because the individual is desperate or needs to pay the bills,” he says. “I’ve talked to folks who say they want to be able to travel more or have money to spoil the grandkids. People are living longer and they want their golden years to be a bit more enjoyable.”
Reverse mortgages allow homeowners to essentially access the equity of their home without having to incur additional debt, according to Hirsch. The borrower will not have to pay it back, since the loan amount can’t exceed the home’s value. The downside is that the homeowner’s heirs may inherit less cash, getting only what’s left from the sale of the home after the loan is paid. In addition, reverse mortgages can be costlier than standard home loans. “Depending on the transaction, the fees can range anywhere from $10,000 to $20,000,” he says. The minimum age requirement is 62, determined by the youngest of the two applicants, if filing as a couple.
Hirsch explains that these mortgages don’t operate like most home loans, in which the borrower’s income determines how much he or she can afford to pay each month. “There are no income requirements for a reverse mortgage since it is based on the value of the home,” he says. And there are several ways in which the cash can be paid. “You can get it in a lump sum, as a monthly payment, through a credit line account or a combination of ways,” he says. No matter the method, borrowers typically don’t have to pay anything back until they sell, move out or pass away.
Reverse mortgages are not for everyone, says Wayne Hoffman, senior VP and CFO of Gershman Mortgage. With a traditional loan, each payment made drives down debt and increases the equity in a home. A reverse mortgage does the opposite: The debt increases and equity decreases, unless the value of a home is growing at a high rate. It may sound like a bad deal, but most reverse mortgage borrowers want to spend down their home equity, Hoffman says. There are also upfront fees with a reverse mortgage, he points out. “The other options available, like home equity lines of credit, may have lower fees, but you have to pay the loan back (out-of-pocket),” he says. “That’s what a lot of seniors are trying to get away from.”
Hoffman says misconceptions abound about reverse mortgage loans. “There’s little education about them and plenty of misinformation,” he says. “There is no way you can lose your house as long as you live in it: You retain the title and you can still pass it on to your heirs.” He adds that most reverse mortgage loans are government insured, which should provide some assurances to the borrower. “These aren’t scams. The fees are fixed and as time goes on, the fees will be reduced.”
With the ever-increasing array of options available for those seeking reverse mortgages, Hoffman advises potential borrowers to work with a reputable and experienced lender. “See what products are out there and ask about the fees,” he says. “See what interest rates and margins would yield the best returns. Also, get advice from your children and your legal and financial advisers.”
Whether your interest in a reverse mortgage is need-based or desire-based, Hoffman says a reverse mortgage could be life-changing. “Either you’re someone on a fixed income who still needs to pay the mortgage and other bills or you have a home that’s worth a lot of money, but you want to pay for your grandchildren’s education or travel. This may be the answer,” he says. “It’s changed people’s lives—I’ve seen it with my own eyes.”