A reverse mortgage is a type of home equity loan that allows homeowners aged 62 and older to convert some of the equity in their home into cash. Borrowers get to remain in their homes without making payments until the last surviving borrower dies, no longer lives in the home as a primary residence, or sells the house. At that time, the lender will sell the home to pay off the reverse mortgage.
A reverse mortgage can provide you with much-needed cash, but it can also use up the equity in your home so that there are fewer assets for you and your heirs. You should also be aware of the following when considering a reverse mortgage:
- Home Maintenance and Other Requirements - Even though you don’t have to make monthly mortgage payments, you are still responsible for property taxes, insurance, utilities, home repairs and maintenance. If you fail to keep up with these costs, the lender might require you to repay the loan.
- Costs, Fees and Interest - A reverse mortgage comes with closing costs, just like a regular mortgage, as well as servicing fees over the life of the mortgage. In addition, interest will be added onto the balance of the loan each month, so the amount you owe keeps increasing over time. However, with most reverse mortgages, you cannot owe more than the value of the home when the loan becomes due.
- Mandatory Counseling - Before applying for a reverse mortgage, potential borrowers are required to meet with a counselor from an independent government-approved housing counseling agency, who must explain the loan’s costs and financial implications, and discuss possible alternatives. For a list of approved counselors, contact the Department of Housing and Urban Development (HUD) by calling 1-800-569-4287 or by visiting hud.gov. It is also advisable to meet with a lawyer or trusted financial advisor (who does not sell reverse mortgages) before entering into a reverse mortgage.
- Protecting your spouse - It is a good idea to make your spouse a co-borrower when you apply for a reverse mortgage. This way, your spouse can continue to live in the home and receive money from the reverse mortgage even if you die or move to a nursing home. If your spouse is not listed as a co-borrower, he or she might still be permitted to remain in the home after you leave, but only if certain requirements are met. However, your spouse would not be eligible to receive any money from the reverse mortgage.
- Comparison shop - Review the different types of reverse mortgages available and compare the terms and fees offered by several different lenders.
- Steer clear of scammers - If someone is pressuring you to buy a reverse mortgage or suggesting you get one so that he/she can sell you home improvement services or financial products, walk away.