More than 78,000 reverse mortgages were insured last year by the U.S. Department of Housing and Urban Development (HUD). These federally insured loans, also called Home Equity Conversion Mortgages (HECMs), have become more popular as older Americans are looking to tap the equity in their homes so they can age in place.
More than 660,000 reverse mortgages were issued between 1990 and 2010. Here are some frequently asked questions about these loans.
Q: What is a reverse mortgage?
A: A reverse mortgage is a special type of loan that allows you to borrow against the equity that you've built up in your home. You must be at least age 62 to qualify. You can put the money toward anything you like, from paying medical bills to making home improvements. Unlike a traditional home equity loan, a reverse mortgage doesn't need to be paid back immediately, perhaps not even during your lifetime. That means no monthly checks to write to your lender. The HECM reverse mortgage program is run by the Federal Housing Administration (FHA).
Q: Can anyone apply for a reverse mortgage?
A: No, you have to be at least 62. You also have to own your home outright or be able to pay off your home with the proceeds from a reverse mortgage. You must live in your home and your home must meet certain criteria according to HUD. Most single-family homes qualify, as do some condominiums, manufactured homes and multiunit structures that meet FHA requirements.
Q: How do I apply for a reverse mortgage?
A: You can get a reverse mortgage through a reverse mortgage lender. Before you get a reverse mortgage you must meet with a reverse mortgage counselor, and there is a fee associated with that consultation. Usually, that cost (around $125) is rolled into the loan. You can receive the reverse mortgage in a lump sum, a line of credit or monthly payments. The loans are available in adjustable and fixed interest rates. If you choose a fixed interest rate, you will be erquired to take all of your proceeds in a single lump-sum payment.
Q: If I take out a reverse mortgage, does the bank own my home?
A: No, the title remains with the borrower. When your home is sold, you or your estate will need to repay the lender any cash you received from the reverse mortgage, plus interest and other fees. Any remaining equity in the home belongs to you or your heirs.
Q: Do I still need to pay my property taxes and home insurance with a reverse mortgage?
A: Yes. Reverse mortgages are not like regular mortgages in which insurance and taxes are paid out of an escrow account, so you would have to pay those expenses. If for some reason your homeowner's insurance has lapsed, you will need to reinstate your policy. You also need to be current on any homeowner's association fees.
Q: When do I have to pay back a reverse mortgage?
A: When you die, sell your home or permanently relocate. The loan also becomes due if you default on the loan by not paying your property taxes or homeowner's insurance, or if the property conditions deteriorate and necessary repairs are not made.
Q: Are reverse mortgages expensive?
A: There are substantial upfront fees (i.e., mortgage insurance premiums, loan origination fees and closing costs) with these loans, as well as ongoing fees (mortgage premiums, interest and servicing fees), during the course of the loan. Before you take out the loan, you have to consider how much you will pay in fees so you have enough to cover your expenses.
For example, the standard HECM loan charges a 2 percent mortgage insurance premium up front on the home value – not the amount borrowed – as with regular forward mortgages. For example, if you own a $400,000 home, the upfront MIP would be $8,000 – whether you borrow $30,000 or $200,000.
Q: Is there a cheaper alternative to a standard HECM reverse mortgage?
A: The new HECM Saver loan, which debuted in October 2010, charges only 0.01 percent of a home's value up front. The loan has some restrictions, however. The HECM Saver usually carries a higher interest rate and you can't borrow as much as you can with the HECM Standard. The amount you're allowed to borrow depends on your age, the value of the home and the interest rate. Both HECM Saver and HECM Standard loans require borrowers to pay mortgage insurance premiums on an ongoing basis equivalent to 1.25 percent annually of the outstanding loan balance.
Q: What's the best age to take out a reverse mortgage?
A: Although people are eligible at 62 to apply for a reverse mortgage, AARP policy expert Donald Redfoot says people should postpone getting a reverse mortgage as long as they can to ensure that they will have money later in life for needs like long-term care. Recent HUD data show the average age of borrowers has decreased from 77 to 73 years. "Getting rid of a forward mortgage may seem like a good idea by freeing up income, but borrowers need to understand that they are trading future savings for current consumption," Redfoot says. "Those who borrow early in retirement risk not having that equity available later in life when they may need it."
Q: What are the alternatives to a reverse mortgage?
A: "These loans serve a particular niche, but they are not for everyone," Redfoot says. Before choosing a reverse mortgage, you should consider other options, such as selling your home. You could use the proceeds to downsize to a smaller (and cheaper) residence, or you could rent. If you want to stay in your home but need help making ends meet, think about getting a roommate. Start with family members or friends with whom you're compatible. Besides financial relief, a roommate offers companionship and can contribute to the upkeep of your home. Depending on the value of your home, you might be able to refinance your mortgage, or take out an equity loan or line of credit.
Don't forget to explore the availability of public benefits. For example, if someone has major health care or long-term care needs and a low income, they may be eligible for Medicaid assistance.
Updated Fall 2012