Getting a Good Deal on a Reverse Mortgage Loan

If you are considering a reverse mortgage, shop around to compare your options and the offered terms. Learn as much as you can about reverse mortgages before you talk to a counselor or lender. It will help you ask more informed questions, which could lead to a better deal.

What Is a Reverse Mortgage?

A reverse mortgage is a loan against your home’s equity. Like a mortgage, the amount of the loan depends on the value of the house. Instead of the homeowner paying the bank, the bank pays the owner. In a traditional mortgage, the home purchaser borrows money from the bank to purchase the home, then pays the loan back each month until the balance is zero. The purchaser does not receive the full amount of money from the bank.

In a reverse mortgage, the borrower may receive the entire sum up front or may receive monthly payments depending on the nature of the mortgage. A reverse mortgage lets the homeowner take advantage of their home’s value. It is not repaid while the borrower owns the home.

All reverse mortgages have the same basic requirements. Borrowers must be at least 62 years old and have at least 50% equity in their home. A reverse mortgage cannot exceed the value of the home.

Types of Reverse Mortgage

There are several kinds of reverse mortgages. Review each one to be sure you’re getting the one you want. Not all reverse mortgages let you take the full amount in a lump sum or allow you to spend the money for any purpose.

HECM

The most common type of reverse mortgage is a home equity conversion mortgage (HECM). Reverse mortgage lenders must meet Federal Housing Administration requirements. The loan must follow Housing and Urban Development (HUD) rules.

The federal government insures HECMs and limits the loan amount and interest rates. The use of the loan proceeds is not restricted.

Single-Purpose

Single-purpose reverse mortgages are state and local government programs. They usually have lower interest rates and fees. As the name implies, owners may spend the funds for one purpose, and the lender must approve it. Borrowers often get these mortgages for major home improvements or payment of property taxes.

Proprietary Reverse Mortgages

These reverse mortgages come from private mortgage companies and banks for homeowners whose properties are over the limits set for HECMs. These so-called “jumbo reverse mortgages” have a few requirements. These mortgages are used by homeowners with high-value properties who need to access more of their equity.

To qualify for a jumbo reverse mortgage, homeowners must be:

• At least 55 years of age
• Own at least 50% of the home’s equity
• Have a capital investment in the home at least equal to the amount requested

Jumbo reverse mortgages are a niche market aimed at older people in need of cash whose money is tied up in a high-priced property. These mortgages have no government regulation, so fees and costs may be much higher than a HECM or other bank mortgage.

HELOCs

A home equity line of credit (HELOC) is not a reverse mortgage, but it resembles one. HELOCs and home equity loans are available to homeowners younger than 62. Unlike reverse mortgages, HELOCs allow homeowners to borrow sums against their home’s equity, and then pay the loan back like the original mortgage. Bankers may offer homeowners HELOCs along with reverse mortgages as an option.

Other Considerations for a Reverse Mortgage

A reverse mortgage is similar in certain ways to a traditional mortgage. You must still pay interest on the loan, and the mortgage itself comes with a number of fees. It’s in your best interests to review all the alternatives, since different mortgages have different fees and plans.

Mortgage Counseling

Reverse mortgages aren’t paid off until after you die, sell the property, or change your principal residence. A reverse mortgage has implications for your heirs and surviving spouse that a traditional mortgage may not. For this reason, all borrowers must attend a HUD-approved mortgage counseling session.

These classes explain how reverse mortgages work and what happens after you die or leave the property. They review the pros and cons of a reverse mortgage and examine other alternatives for your particular financial situation.

Origination Fees

All mortgages have origination fees. HECMs and single-purpose reverse mortgages have caps of not more than $6,000 in total. Proprietary reverse mortgages have no limit, since they are not regulated by the federal government.

Mortgage Insurance Premiums

HECMs have an upfront mortgage insurance premium (UMIP) of 2% of the home’s appraised value. All other reverse mortgages have annual mortgage insurance premiums (MIP) of 0.5% based on the amount borrowed. This money forms a fund to protect homeowners and heirs if the amount of the reverse mortgage exceeds the equity in the home.

Interest

Interest comes out of the home’s equity. The more interest that accrues, the lower the homeowner’s equity in the property. Homeowners should be sure they understand this, because there are two types of interest for reverse mortgages:

• Fixed-rate interest sets the interest rate at whatever it was at the time of the loan. You may need to have a lump-sum mortgage to have a fixed-rate interest.
• Variable-rate interest is more common and fluctuates as the Fed changes the national interest. Variable-rate interest can deplete your equity quickly in a volatile economy.

Additional Charges and Fees

Lenders may have their own service fees, closing costs, and other charges when your loan is processed. Many of these may be one-time or annual fees. HECM program lenders should provide you with a “Total Annual Loan Cost” (TALC) that gives you an itemized list of the costs of your mortgage.

Plan Ahead for Your Reverse Mortgage

A reverse mortgage loan must be repaid when the borrower dies, sells the home, or moves from their primary residence. This may leave the heirs or non-borrowing spouse in a predicament if they cannot repay the entire loan. If you intend to use your home’s equity to provide you with some additional income, talk to your financial planner before making any refinancing decisions.

Wait Before Refinancing

Most financial experts suggest waiting to get a reverse mortgage until you really need it. Instead of borrowing against your equity and using it early in retirement, save it for when you have more funds and a greater need.

Modify Your Existing Payment Plan

If you’re concerned about running out of reverse mortgage proceeds now or in the future, you can change your payment plan. Unless you took a lump-sum payment, you can change the payment plans with only a small administrative fee. For instance, if you have a term payment plan and receive monthly payments, you can ask for a switch to a line of credit and use equity when you need it.

Beware of Scams

Reverse mortgage scams are common. Scammers target older people with homes in the hopes they aren’t careful with their money. The best way to defeat scammers is by going to banks you know and trust, and remaining leery of listening to someone who knocks at your door and offers you a really great deal.

Nobody is immune to being scammed. Some very common scams around reverse mortgages include:

• The Home Repair Scam: These scammers sometimes claim they come from your homeowners association or other local government agency. They promise that with a small single-use reverse mortgage, they will get your home looking like new. Once you refinance your house, they leave with your money. This can leave you on the hook for tens or hundreds of thousands of dollars that you didn’t plan to borrow.
• The Annuity Scam: While not a reverse mortgage, some unscrupulous financial planners may push you to buy an annuity instead. An annuity is a trade of a lump sum of cash in exchange for regular monthly payments by a bank or investment company. Taking out a reverse mortgage to buy an annuity is really “robbing Peter to pay Paul.” Scammers do this for the hefty commissions.
• The Power of Attorney Scam: Third-party caregivers and "long-lost relatives" sometimes play this scam. They enter the lives of elderly people and con them into signing over a financial power of attorney. Once they have that, the scammer gets the largest reverse mortgage they can, along with any other money the victim has, and then flees, leaving the victim with no equity and a big repayment bill.

If you have equity in your home, treat it as a valuable asset. Never trust anyone who offers to help you invest unless you asked them to do so. If a promise seems too good to be true, it probably is.

Get Legal Advice From a Real Estate Lawyer

Reverse mortgages are life-savers for older homeowners who need steady sources of income. They can also become money pits and lead to foreclosure and loss of the property if you’re not careful. Get a good financial assessment and discuss your case with an experienced real estate attorney near you before making any decisions about refinancing or a reverse mortgage.