By now, everyone has probably seen at least one television commercial with Robert Wagner, Henry “Fonzie” Winkler or former U.S. Senator Fred Thompson reciting the advantages of reverse mortgages. A reverse mortgage is a type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage (principal or interest) is required until the borrower dies or the home is sold. The years 2008 and 2009 saw an average of 100,000 new reverse mortgages per year.
How It Works
To qualify for a reverse mortgage, borrowers have to be at least 62, own their home outright or carry a mortgage small enough to be paid off by the proceeds. There are no income or credit qualifications, but borrowers remain responsible for paying the taxes and property insurance. The loan does not need to be repaid until the borrowers move or die.
Despite the simple qualification rules, reverse mortgages can be risky. As of 2012, about 1 in 10 of all reverse mortgages was in default. Some of that may be caused by borrowers using reverse mortgages at younger and younger ages, sometimes even before they retire. In 2011, 73% of borrowers took a lump sum payment rather than a stream of payments. If all the equity is withdrawn in one lump sum payment and that payment is used for living expenses, the borrower could run out of money before his death. He may also forget how quickly the loan balance can outpace the value of the house because interest continues to accrue on the loan even though no payments are required.
Another problem can occur when only one spouse meets the age requirements for the reverse mortgage. If the “underage” spouse is left off the deed, that spouse may have only one year after the borrower’s death to pay off the loan or move out.
To protect yourself, experts suggest that you:
- consult with an independent financial adviser before applying for a reverse mortgage
- make sure the mortgage is insured by the FHA
- verify that your obligation can never exceed the value of your home
- be wary if you are pressured to invest the reverse mortgage payment in an annuity, insurance policy or other investment
If you are uncomfortable, download AARP’s reverse mortgage booklet “Borrowing Against your Home” or get general information from The U.S. Department of Housing and Urban Development.