If a homeowner will enter retirement with substantial equity in their home, that home can act as an additional pool of money to be factored into retirement planning. A reverse mortgage permits the retiree to access their home equity without selling the home and leaving it.
A reverse mortgage is one tool in a retirement planning tool belt. Like any tool, used properly it helps to get the job done safely and well. Also like any tool, it can be used inappropriately and be unsafe.
Some of the most common answers about the safety of reverse mortgages provide the truth, but only part of the truth. For example, many people ask if reverse mortgages are safe in regard to property title. It is true that a homeowner who takes out a reverse mortgage keeps the title, but there other title dangers associated with reverse mortgages. Prospective borrowers ask if reverse mortgages are safe from default. It is true that there is never any danger of default on repayment because there are no monthly payments for reverse mortgages. However, failure to meet other requirements of legitimate reverse mortgages can force loan repayment. Additionally some seniors have had loan default problems associated with reverse mortgage scams.
The first danger area is title tinkering. Reverse mortgages are only available in the U.S. if all title holders on the property are at least 62 years old. One potential misuse of the reverse mortgage tool would be where one spouse in a married couple was over 62 and the other was significantly younger. That couple might think of taking the younger spouse off title in order to qualify for the reverse mortgage. The couple should not make that decision without consulting an expert in estate planning because it could have very significant consequences on the estates of both spouses.
A second possible danger area is scammers. Reverse mortgages have to be the only lien on a property. To get a reverse mortgage when a home still has a balance in a typical home loan, funds from the reverse mortgage pay off the remainder of the existing loan. There have been a number of scams perpetrated on seniors, where unscrupulous agents have supposedly arranged a reverse mortgage with a payoff of the existing home loan. Instead, the scammer pocketed the payoff funds, leaving the seniors in default on their first mortgage. Any homeowner arranging a reverse mortgage should make certain they are dealing with a reputable source of FHA reverse mortgages, such as a well known bank.
Reverse mortgages have legitimate residency and upkeep requirements. To remain qualified for a reverse mortgage, the home owner has to live in the home more than half the year. Many seniors will develop health issues as they age that require long stays in residential health care facilities. If the homeowner lives away from home for over a year, the lender can require repayment of the mortgage. Any retirement plan that includes a reverse mortgage should also factor in the issue of residential care.
In addition to the residency requirement, reverse mortgages also have upkeep requirements. They require the homeowner to maintain the home, maintain homeowner’s insurance, and to pay the real estate taxes. The lender can require repayment of the mortgage, including selling the home, for failure to meet any of these requirements. The loan also comes due when all the homeowners have died, or if the home is simply sold by the homeowner.
Homeowners are concerned if their heirs will be safe if the final loan amount is greater than the value of the property when the loan comes due. Reverse mortgages are safe in that when the home is sold, the loan issuer is only entitled to recover the outstanding mortgage amount. If the home sells for more than that, the excess funds belong to the homeowner or the heirs, and if it sells for less, the lender has no recourse. No recourse means the lender cannot seek any additional funds from the homeowner or the homeowner’s estate.
The rest of the truth about the final value of a home when a reverse mortgage comes due is that there is not likely to be much left for the estate. Reverse mortgages tend have substantially higher origination costs than normal mortgages on the same size properties. They also accrue compounded interest, rather than simple interest. If a reverse mortgage is in place for several years, the power of compound interest can balloon the size of the loan, possibly beyond the value of the property. This does not endanger the homeowner or the heirs because the loan is non-recourse. However, it does mean that the home should not be expected to contribute much to the size of the final estate.
Reverse mortgages can be a safe and powerful retirement resource, as long as homeowners get good retirement and estate planning advice and use reputable mortgage lenders for the loans themselves .