You may have seen the recent television commercials with “The Golden Girls” star, Rue McClanahan, which advertises reverse mortgages. What are these loans? Who is eligible? And what are the risks involved?
A reverse mortgage is a type of loan that is available to senior citizens who have a lot of equity in their homes, but little cash on hand. It is literally a mortgage in reverse, where a homeowner is able to access equity locked in their home through a special loan from the bank. This money is paid out either in monthly installments or all at once. There are no monthly costs for the borrower to pay, and the loan becomes mature only when the property is sold or when the homeowner dies. At that time, all interest and fees associated with the loan are due in one lump sum.
For seniors who need money for day-to-day expenses like medications, bills, or travel funds, a reverse mortgage can be a great option.
Other home loans are available, but they require monthly payments, which can be difficult for some seniors to afford. This is one of the reasons that a reverse mortgage can be a good fit for some people; not only can they free up some cash from their home equity, but they can do so without adding to their monthly expenses.
On the downside, because the money for this type of loan comes out of the home equity, a reverse mortgage can affect the amount of inheritance that beneficiaries will receive. When the property is sold (or at the time of the owner’s death), the bank takes back all monies owed to them, leaving what’s left over to the borrower. The more money taken out on a reverse mortgage, the less money will be left for the heirs of the estate. Fortunately, there is a limit to how much can be owed. When the property is sold, if the proceeds from the sale are lower than the amount still due on the loan, the bank will eat the difference.
In order to qualify for a reverse mortgage, the borrower must be 62 years of age or older, use the property as their primary residence, keep their home in good repair, and must have paid off all or most of their mortgage. If there is an outstanding balance on the mortgage, it must be paid in full with funds from the new loan.
If possible, a better solution is to sell the property and downsize to a smaller home or apartment. This would allow the homeowner to live off the profits from the sale, without owing anybody anything. However, this is not a viable option for everyone, especially in a slow real estate market.
A reverse mortgage can bring great relief to seniors, but this type of financing is not the answer for everyone. The costs involved with this type of loan are quite high in the beginning, although the borrower won’t be impacted by it on a month-to-month basis. If the homeowner doesn’t plan on staying in the house for very long, the costs of taking out this type of loan can be too great for it to be practical. Some fees must be paid for upfront (using money from the loan), and closing fees can be higher than with other types of financing. A homeowner should only consider this type of loan if she is planning to stay in the house for a long time. If she’s at all unsure about her plans, it may be a better idea to take out a different type of home loan, or to look into the option of selling the property.
Because predatory lenders often target seniors, the government has made it mandatory for all those interested in acquiring a reverse mortgage to speak with a qualified third party advisor. This will ensure that the borrower is doing what is in his best interest, including choosing a reputable lender with which to do business.