If you’re a senior on a fixed income, a reverse mortgage may seem appealing.
What is a reverse mortgage?
A reverse mortgage is the opposite of a traditional mortgage. With a regular mortgage, the homeowner starts out with a fixed amount of debt and makes monthly payments of both interest and principal until that debt is paid off in full. This means that at the end of the loan, the homeowner owns 100% of the home and no longer needs to make mortgage payments.
With a reverse mortgage, the opposite is true. Instead of making a monthly mortgage payment, the homeowner is paid a lump sum or monthly payment (or is granted a home-equity line of credit). Each payment reduces the homeowner's equity. Typically, the owner dies before the payments, plus interest, exceed the value of the house. When this happens, the debt is the responsibility of the owner's estate, and the house is usually sold to repay the loan, unless other funds are available to settle the loan. Alternately, the home could be sold before this if the owner moves out to live with relatives or is placed in a nursing home.
Why are some seniors choosing reverse mortgages?
For many seniors, it is comforting to remain in their home while drawing monthly income from the equity they’ve built up over the years. Choosing a reverse mortgage may add to limited, fixed income. With a reverse mortgage, a homeowner is still required to pay real estate tax, insurance premiums and maintenance costs.
Since their inception, few homeowners have jumped on the reverse mortgage bandwagon. There are currently fewer than 200,000 people using them in the U.S. Most of them are women, and their median age is about 75. Reverse mortgages are more popular in the West and Northeast where housing costs are higher.
What are the disadvantages of reverse mortgages?
Reverse mortgages have high upfront costs. These costs vary, but often include origination fees and insurance premiums, which can range from $4,200 to $6,700 for a $150,000 loan. Reverse mortgage borrowers also must pay a monthly service fee.
Perhaps the biggest drawback of a reverse mortgages is losing equity in a home that one has spent years building. Most lenders require reverse mortgage borrowers to attend informational sessions explaining the program before the deal is completed to ensure borrowers fully understand the terms.
When is a reverse mortgage not a good idea?
A reverse mortgage is probably not worth the upfront fees if you plan to move within the next few years. If you have planned on passing a paid-off home to your family, a reverse mortgage may not be for you.
Before considering a reverse mortgage, thoroughly research the terms and fees. Know that your home’s equity is at stake.