Reverse Mortgages and Older Adults: The Basics
Reverse mortgages are loans in which a homeowner borrows money against the value of their home. These types of mortgages are designed for, and only available to, homeowners age 62 and older, so they involve unique requirements and risks.
Reverse mortgages are loans in which a homeowner borrows money against the value of their home. These types of mortgages are only available to homeowners age 62 and older.
There are three types of reverse mortgage loans. A single-purpose reverse mortgage, a federally insured reverse mortgage, and a proprietary reverse mortgage. Each type of reverse mortgage loan has its own eligibility requirements and risks. It's important to understand the basics of each to find the right reverse mortgage for you.
Read the complete Reverse Mortgage Guide for Older Adult Homeowners in FindLaw's real estate section for more details.
Reverse Mortgage Basics Explained
A reverse mortgage allows a homeowner to use their home equity as collateral. This enables a homeowner to receive money as an annuity, a lump sum, monthly payments, or a line of credit. Usually, an older adult homeowner will use these funds to supplement retirement income or pay for health care expenses or in-home care.
Typically, the loan comes due after an agreed-upon period or when the borrower dies. The mortgage company bases the amount on the appraised value of the borrower's home.
Generally, the borrower must meet all the following criteria:
- At least one listed homeowner, 62 or older
- The home must be the homeowner's primary home
- The home loan balance must be all or mostly paid off
If a homeowner meets these requirements, they may get a reverse mortgage from a reverse mortgage lender.
Types of Reverse Mortgages
The three types of reverse mortgages each have specific requirements and terms.
- Home Equity Conversion Mortgage (HECM): The U.S. Department of Housing and Urban Development (HUD) regulates federal government loans. A Home Equity Conversion Mortgage (HECM) is the only reverse mortgage loan insured by the U.S. Federal Government. It's available through a Federal Housing Administration (FHA)-approved lender. Taking out an HECM requires that you have mortgage insurance and pay higher insurance premiums.
- Single-Purpose Reverse Mortgage: Single-purpose reverse mortgages tend to have lower costs. But, borrowers can only use the money for a specific purpose, which the lender specifies. You will qualify for a single-purpose reverse mortgage if your income is low or moderate.
- Proprietary Reverse Mortgage: Mortgage companies or financial institutions offer proprietary reverse mortgages. A proprietary reverse mortgage, or a jumbo reverse mortgage, allows homeowners to apply for a larger loan amount.
Features and Risks of Reverse Mortgages
Depending on the type of loan, a homeowner can use the borrowed money to:
- Pay for home repairs
- Pay off traditional mortgage payments
- Pay for medication or living expenses
- Ensure a consistent monthly retirement income
- Take a long-desired vacation
- Buy a house
For example, suppose a retired homeowner finds that their income from savings or Social Security payments isn't enough. In that case, a reverse mortgage is useful for increasing monthly income. A reverse mortgage can provide a guaranteed income for the rest of your life. This can ensure that you or your loved one can afford assisted living or end-of-life caregiving costs.is
Reverse mortgages also involve unique risks. A senior citizen may have diminished decision-making capacity and can't fully understand the terms and obligations of these loans. They are susceptible to deceptive advertising or face financial pressure to pay for long-term care or nursing home costs.
Potential borrowers should know that:
- Foreclosure may occur due to a failure to pay property taxes or homeowners insurance, as these obligations remain the borrower's responsibility.
- Once the last surviving homeowner dies, the loan comes due. The heir or estate administrator typically has 30 days for repayment. They can also sell the house or allow the lender to foreclose.
- Reverse mortgages typically involve high fees and costs, with compounding interest rates.
- Reverse mortgages can affect Medicaid or Medicare eligibility.
For a more detailed explanation of issues, read Findlaw's article on the features of reverse mortgages.
Changes to Reverse Mortgage Regulations
Reverse mortgage regulations continue to develop. There was a lawsuit filed, and the U.S. Department of Housing and Urban Development issued new rules allowing a surviving spouse of a homeowner-borrower to continue to live in the home if the homeowner-borrower dies.
This new rule applies to federally insured reverse mortgages obtained on or after August 4, 2014. Before that date, a reverse mortgage loan came due if a homeowner-borrower died and their spouse was not listed as a borrower. This meant that the surviving spouse would have to move out.
Now, only one spouse must be 62 years old or older for a married couple to qualify for a reverse mortgage. Before, the rule required that both spouses were 62 or older.
Lastly, according to the Consumer Financial Protection Bureau, starting June 30, 2023, reverse mortgage lenders will change to a new interest rate index. This may have a small effect on reverse mortgage loan balances.
State Regulations for Reverse Mortgages
Many states have enacted their own reverse mortgage laws. In Texas, for example, a 2013 proposition created new lender disclosure rules to ensure borrowers know the conditions and consequences of reverse mortgages.
In California, a 2014 law requires lenders to provide potential borrowers with a self-evaluation questionnaire informing the borrower of the need to understand the mortgage terms fully.
Another California law, enacted in 2012, prevents insurance brokers and agents from participating in reverse mortgages unless they meet certain stringent conditions.
Getting Legal Advice
Reverse mortgages are complex and can involve high fees, closing costs, and significant legal issues. Potential borrowers need to know their rights and their obligations under these loans.
If you or someone you know is considering a reverse mortgage, it's important to seek legal services from an experienced elder law attorney near you.
Can I Solve This on My Own or Do I Need an Attorney?
- For situations involving mortgages, it’s best to ask an attorney their opinion
- Cases with mortgage issues are rarely cut and dry
- Get customized advice and ask your legal questions
- Many attorneys offer a free consultation