What is a Reverse Mortgage?
So, just what is a reverse mortgage?
Why do people take them out?
And, are they good or bad?
Reverse Mortgage Defined
A reverse mortgage is a loan you can take out against the equity on your home to provide you a cash flow, often in retirement.
Contrary to a regular mortgage, the bank will pay you an agreed on sum of money each month, instead of you paying them. Consequently, that is why it is called a reverse mortgage.
Home Equity Conversion Mortgages (HECM) is the technical name for a reverse mortgage. The FHA insures them. Moreover, they are “non-recourse” loans. This means that even though there might be interest applied, the repayment of the loan will never be more than the actual value of the house when it is sold.
Does My House Qualify for a Reverse Mortgage?
To be able to do a reverse mortgage, you must have equity in your house. This means you have to owe less on your house than it is worth and then have value on it beyond that to draw cash from.
Moreover, the government states you must only have a “small balance” left on your current mortgage, or you must own the home outright. Which makes sense if you want to borrow against it.
Why Do People Take out Reverse Mortgages?
As pensions become less common and 401k’s end-up smaller than one hoped, seniors need to get creative. A home is often times one of the biggest assets retirees hold when they stop working.
Consequently, when other assets are not as robust as they need to be to provide for living expenses, seniors turn to their home for cash.
Are Reverse Mortgages Good or Bad?
As a tool to provide cash flow in retirement – reverse mortgages are neither good nor bad – they are neutral. They are good for providing cash flow in retirement, if your house is one of the ONLY places you have access to cash. However, they can be bad if you take one out incorrectly or without carefully considering how to use one responsibly.
What to Consider Before Taking out a Reverse Mortgage
Reverse mortgages can be useful, but there are things to consider carefully before taking one out.
- First, you must be very careful who you work with when you take out a reverse mortgage. There are mortgage scams and frauds out there.
- Second, you must still pay your property taxes and homeowners insurance each year or your house could end up in foreclosure. According to the US Government Accountability Office, defaults increased 2% from 2014 to 18%. These defaults were mostly due to borrowers not paying taxes/insurance or failing to meet the occupancy requirements. Which brings us to the next point.
- Third, the house you reverse mortgage must be your primary residence.
- Fourth, you must be at least 62 years old to take out this kind of mortgage.
- Finally, in addition to owning your home or only having a small balance left on it, you must also not have any outstanding debts to the Federal government. (For example, back-taxes.)
How Do I Start the Process?
First, if you are considering a Reverse Mortgage, the first step is a required consultation by an approved HECM counselor. You can find a counselor on this government search page.
Then, to find a HUD (U.S. Department of Housing and Urban Development) certified lender, you will also need to visit this government web-page.
For more information, and to get your specific questions answered, please visit the FHA Resource Center.
Further Retirement Reading
If you are looking for other ways to generate cash flow in retirement, that do not involve mortgaging your house, please start with our very popular article series – The New Rules of Retirement.