Financial planning tools and services to put you on the path to the future you want
Your guide to financial planning and retirement
Connect with peers and experts
Get to know the people behind the company and the mission behind the work
Digital financial planning and guidance at scale
September 3, 2021
Do you know your reverse mortgage facts? More and more people are becoming aware of reverse mortgage as an option for tapping their home’s equity. Maybe you heard about the loan on a personal finance blog or from Tom Selleck on late-night TV. However, what is really true?
With all of the buzz about retirement financing options today, it can be difficult to sort out what to believe when the information you get is incomplete or sounds like marketing spin. Are reverse mortgages safe? How does the government fit in? Can anyone get a reverse mortgage?
Here are 14 reverse mortgage facts to know before using this type of loan to supplement retirement income.
There are some restrictions on who can apply for a reverse mortgage. The primary borrower must be 62 years old, and must have enough home equity to qualify. There will also be a financial assessment to determine that the borrower is fit to uphold the requirements of the loan. Other than that, reverse mortgages are good for anyone who wants to tap their home’s equity without going through the process of taking out a traditional mortgage.
Reverse mortgages are used by many different types of households, from high net worth couples and individuals who are riding out market swings that are impacting their other investments, to families that need additional monthly cash flow to help make ends meet.
There’s no one reason to take a reverse mortgage, and there’s no one person for whom the loan is the “right” option. To find out if you qualify for a reverse mortgage, you can get a free estimate or talk with a financial planner.
Many people erroneously believe that the bank or the government owns your home when you get a reverse mortgage. A reverse mortgage is a loan, and reverse mortgage borrowers hold the title to their homes throughout the entire course of the loan. The amount of your loan depends on factors including your age, the value of your home, and current interest rates. If you know the value of your home, you can get a free estimate of the loan amount you may eligible for.
Once the loan becomes due because the borrower passes away or moves, the borrower or their heirs will be responsible for repaying the loan. Often, this is done through the sale of the home, and if the value of the loan is greater than the value of the house, the amount of the loan not paid by the sale of the house is paid by mortgage insurance. Reverse mortgage borrowers do not have to pay more than the value of the home when the loan comes due.
Although it’s often the case that heirs sell the home to repay the loan, that is not their only option. In the case where a borrower has passed away, heirs are entitled to pay off the reverse mortgage through whatever means they choose.
If they are able and wish to repay the loan with outside funds and keep the home, that’s up to them to decide.
Furthermore, it is important to note that research indicates that most families would rather get a reverse mortgage than lose independence or compromise their quality of life.
A reverse mortgage is a loan that allows a borrower to take from the home equity he or she has amassed over time. Once this money is spent, the home holds less value. There is also interest that accrues and must be repaid when the loan comes due. Because of this, a reverse mortgage is likely to reduce your net worth.
However, if you get a reverse mortgage but do not use the loan proceeds and simply keep them in a line of credit, it is possible that a reverse mortgage could improve your net worth.
Three trends are making reverse mortgages more popular than ever before: 1) Americans have not saved enough. 2) Housing values are at all-time highs. 3) The HECM Reverse Mortgage has had many recent modifications to make it a safer product for seniors.
When there are low interest rates and high housing prices, it can be a good time to get a reverse mortgage. However, the decision to get a reverse mortgage should be part of your lifelong financial plan and not be done on a whim.
A recent study by the Consumer Financial Protection Bureau (CFPB) found that most reverse mortgage TV ads are misleading or confusing. Reverse mortgages are somewhat complicated and it is important to understand fact vs fiction. Here are the truths behind the ads.
Drawing on your home equity is one option to free up home equity in retirement, but downsizing is another popular choice.
By selling your home and relocating to a smaller property, you may see more financial efficiencies than if you were to take out a reverse mortgage on your existing home. However, if staying in your current home is your goal, a reverse mortgage may be an option worth considering.
Most people are familiar with the “lump sum” option for receiving reverse mortgage proceeds. In fact, the lump sum reverse mortgage has lost popularity in recent years due to changes to the government-insured Home Equity Conversion Mortgage program. Today’s borrowers are more often taking their reverse mortgages as credit lines, or under term or tenure payment plans.
Like any home loan, borrowers face upfront costs including a mortgage insurance premium, an origination fee paid to the loan originator, appraisal fees, counseling fees, and additional closing costs such as title and notary fees. The origination fee for HECM loans is capped, but it’s a good idea to ask what these potential fees are likely to total in advance of paying them.
The vast majority of reverse mortgages are taken out as HECM loans under the government-insured program. There are also private reverse mortgages available through lenders that may offer some additional benefits to borrowers, such as the ability to borrow a higher level of home equity. Ask a reverse mortgage specialist for details.
According to the Federal Reserve, 80 percent of Americans’ non-financial assets are represented by their homes, and a report published by the Brookings Institute reports that home equity is the biggest source of credit for most Americans.
Home equity may be your biggest asset, and therefore, your most viable option for financing your retirement. A reverse mortgage is one way to tap into this home equity.
Reverse mortgages are not limited to the HECM type, nor are they strictly loans used to remain in the home you currently own. Here are the most popular types of reverse mortgages.
If you are looking to get a reverse mortgage and purchase a new home all in a single transaction, contact a reverse mortgage specialist to learn more about the HECM for Purchase program. Just like there are different problems facing many households, there are different reverse mortgage types to help solve them.
Getting a reverse mortgage is not for everyone. Like most things, the decision to get a reverse mortgage — or not — depends entirely on what the right decision is for you.
There are many different personal factors to consider. If you are unsure whether the loan is right for you, you might consider using the reverse mortgage suitability quiz, or get a quick estimate of how much you may be able to borrow.
Share this post:
Our weekly newsletter full of inspiration, podcasts, trends and news.
© 2022 NewRetirement, Inc. All rights reserved.
Disclaimer: The content, calculators, and tools on NewRetirement.com are for
informational and educational purposes only and should not be construed as professional financial
advice. NewRetirement Planner and PlannerPlus are tools that individuals can use on their own behalf to
help think through their future plans, but should not be acted upon as a complete financial plan. We
strongly recommend that you seek the advice of a financial services professional who has a fiduciary
relationship with you before making any type of investment or significant financial decision.
NewRetirement strives to keep its information and tools accurate and up to date. The information
presented is based on objective analysis, but it may not be the same that you find on a particular
financial institution, service provider or specific product’s site. All content, tools, financial
products, calculations, estimates, forecasts, comparison shopping products and services are presented