Cash flow is a serious concern at any age, and especially for seniors. After retirement, it can be harder to find the money you need for the things you want to do. Whether it’s house repairs, wanting to fund a vacation, or simply everyday bills piling up, it’s stressful when you have more expenses than you do available cash.
Seniors (who still own their homes) looking for a way to free up some cash might find themselves wondering if a reverse mortgage is right for them. For some seniors, a reverse mortgage is a practical way to free up home equity and get a hold of a cash lump sum. This money can be used for things such as home repairs, living expenses, to help grandchildren with college, consolidate debt or pay for in-home care.
However, a reverse mortgage isn’t something to enter into lightly. Before we look at some reverse mortgage companies, let’s explore how reverse mortgages work, and what to be aware of when you’re shopping for one.
What Is A Reverse Mortgage?
A reverse mortgage is a home equity loan that’s taken out against your home. Because the mortgage is technically an advance against the equity of your house, you receive a payment every month, instead of making a payment each month.
This can be hard to wrap your mind around! The main thing to remember is that a reverse mortgage is a loan. The payments are loan payments being made to you, and you will eventually be required to repay that loan. We’ll talk more about how a reverse mortgage is repaid in a moment. But first of all, let’s take a look at the different types of reverse mortgage.
What Kinds Of Reverse Mortgage Are There?
Reverse mortgages fall into three categories:
A single-purpose reverse mortgage can be used for one single purpose, agreed upon by the lender. For example, you might get one to cover some home renovations. These are usually taken out via a state or local government agency.
A proprietary reverse mortgage is a private loan that you enter into with a private company in much the same way you’d enter into any loan agreement. You can use them however you wish.
A home equity conversion mortgage (HECM) is a federally-insured reverse mortgage. You can use them however you like. These are the most common type of reverse mortgage, and they are only available through FHA-approved lenders, which provides you some extra peace of mind too.
How Are Reverse Mortgage Payments Made?
You can receive payments in three main ways (though do be aware that not every mortgage offers every payment option):
#1. Tenure – you receive regular monthly payments for the term of the loan, as long as one of the applicants is still living on the property.
#2. Term – you get a fixed monthly payment over a specified period of time.
#3. Line of credit – you can use the amount of the loan as a line of credit and make withdrawals on it when you need to, until the line of credit is used up.
In some cases, you can opt for a modified tenure or term, where you get regular payments and a line of credit, too.
Some lenders also offer the alternative of a fixed interest rate mortgage which gives one single lump sum payout.
Who Is Eligible For A Reverse Mortgage?
To get a reverse mortgage, you’ll need to be 62 or older. The home you’re applying for must be your primary residence. You’ll need to either own your home outright or be able to pay off the remainder of your home using the reverse mortgage proceeds.
You will also be asked to attend a mandatory HECM counseling session, and your home must meet all FHA property standards and flood requirements.
How Are Reverse Mortgages Repaid?
The main thing to remember when you take out a reverse mortgage is that it’s a loan. And, like any other loan, it will eventually require repayment.
Reverse mortgages come due and payable when the borrower moves from the home (such as into assisted care), or when they pass away.
Reverse mortgages are usually paid back by selling the home that the loan was taken out on. In the case of death, heirs also have the option to repay the remainder of the reverse mortgage themselves or refinance it through another company if they want to keep the home.
A reverse mortgage can seriously impact whether or not you can leave your house to your family in your will, as its equity will likely be tied up in paying off the mortgage.
What About Spouses and Family Members Who Live in the Home?
Married borrowers should make sure their spouse is a co-borrower on the loan. They should also double-check the small print to make sure their spouse will be allowed to keep living in the home in the event of the borrower dying or moving to a care facility.
Other family members such as children or siblings who share the property are not protected by a reverse mortgage. In the case of there being no living borrowers remaining at the property, any other people living in it will need to move out.
Property Maintenance Rules for Reverse Mortgages
Borrowers are responsible for keeping the house in the condition it was when the loan started. Reasonable wear and tear is acceptable, but in general, you’ll need to keep up to date on all home repairs and maintenance.
You’ll also need to remain current on property taxes, homeowner’s insurance, and any other mandatory payments such as homeowners association dues.
If you don’t keep up to date on taxes, insurance and maintenance, you run the risk of foreclosure.
Pros and Cons Of A Reverse Mortgage
There are pros and cons to consider regarding taking on a reverse mortgage.
Pros of a Reverse Mortgage
- Frees up cash that you can use for other things.
- Can help you stay in your home by providing cash for repairs, upkeep, or paying off the remainder of your existing mortgage.
- Flexible payment terms such as receiving a lump sum, a line of credit, or regular payments.
- You can’t technically default on it. Although you can be forced to foreclose if you miss tax and insurance payments, you can’t default on a reverse mortgage the same way you can a standard mortgage.
- HECM reverse mortgages are federally insured, so even if your lender defaults, you won’t suffer.
Cons of a Reverse Mortgage
- Reverse mortgages can be expensive. As well as considerable upfront fees, most reverse mortgages come with ongoing fees such as interest and servicing fees.
- A reverse mortgage might disqualify you from certain types of federal or state benefits, such as Medicaid.
- The loan comes due if you move, which means they’re only suitable if you plan to remain in your existing home for as long as possible.
- Not all properties are covered. For example, some lenders won’t cover condos, properties below a certain value, those with solar panels, or prefabricated homes.
- Some lenders only operate in certain states.
Alternatives To A Reverse Mortgage
Reverse mortgages aren’t for everyone. If taking one out doesn’t make sense for your specific circumstances, you might want to look into alternatives. Viable alternatives to reverse mortgages including refinancing your existing mortgage, taking out another kind of loan, or downsizing your home to free up some equity.
Always Get Advice Before Taking Out a Reverse Mortgage
There’s no doubt that for some seniors a reverse mortgage can free up some much-needed cash. However, like any other serious financial commitment, it’s important to enter into the agreement with your eyes wide open. HECM lenders will offer you a mandatory counseling session, and you might also consider talking to an independent financial advisor to make sure you understand all the pros and cons before you sign up.
Top Reverse Mortgage Lenders for Seniors
There are several reverse mortgage lenders out there. We take a look at three of the most popular ones and find out what their customers are saying about them.
American Advisors Group
AAG was named the number one reverse mortgage lender in 2013. They train their staff rigorously – reverse mortgage professionals go through loan officer training and licensing, and must pass federal and state tests to get licensed.
What are customers saying?
Reviews about AAG are largely positive. We noticed a lot of people praising their knowledgeable staff, and the level of service they received. On the downside, we noticed that some people had difficulty getting their calls returned, or felt that they were kept out of the loop during the application process. However, most reviews online tend to the positive.
One Reverse Mortgage
One Reverse Mortgage was established in 2001 and offers several different reverse mortgage options for borrowers. In addition to a standard HECM, borrowers can also opt for a HECM for purchase, which is a reverse mortgage used to buy a new home, so that you don’t have to make mortgage payments on it.
One Reverse Mortgage also offers its own product – HELO, short for Home Equity Loan Optimizer. HELO was designed for people who don’t qualify for a standard HECM loan. It has fewer loan restrictions, including fewer property restrictions and higher lending limits. HELO is a fixed-rate loan given as a lump sum. You can choose to make payments towards decreasing the amount of the HELO loan. Tax and property upkeep rules still apply.
What are customers saying?
Just as with AAG, we came across plenty of positive reviews citing kind, knowledgeable customer service reps. In particular, several reviewers mentioned feeling like the team genuinely cared about them. On the flip side, some people reported being misinformed and thus spending a long time going through the process only to be denied, while a few others mentioned feeling pressured or talked down to by reps.
Finance Of America
Finance Of America is proprietary (not federal-backed) reverse mortgage provider. They offer an impressive range of reverse mortgage options. Their HomeSafe loan is very flexible – there are five versions of it, all offering different payment options from a lump sum to a line of credit, and an option that provides a lump sum followed by regular payments. They also offer a product called HomeSafe Second, which allows borrowers to leave an existing low-rate first mortgage in place while using the new loan to gain access to additional cash without increasing their monthly payments.
HomeSafe property requirements are fairly flexible. There is no minimum property value, and some condos are covered provided they’re valued over $500,000. Spouses who aren’t named on the loan are protected under some plans (contact lender to find out if this applies to your individual circumstances.)
What are customers saying?
Finance of America attracts plenty of good reviews for its thoughtful, kind customer service, and the way they walk borrowers through every step of the process. However, as with any company, not every rep has a good bedside manner, and some people felt they’d been misled as to how much money they would receive, or how much interest they’d need to pay.
Bottom Line on Reverse Mortgages
It’s a myth that a reverse mortgage should only be used as a last resort option. In the right circumstances, a reverse mortgage can free up some much-needed cash and help seniors age in place.
However, every individual circumstance is different and we recommend considering the fees, the risk of foreclosure, and the impact on one’s estate carefully before committing. As always, we suggest reading the small print carefully.