“What goes up must come down,” so goes the saying. And, to that end, what goes forward must also go in reverse. Turns out the same also applies to mortgages, sort of. Except, instead of being a direct inverse from a “forward” mortgage, reverse mortgages are kind of their own special thing.
If you don’t read beyond this opening section, just remember that the big takeaway here is going to be that some reverse mortgages are good, some are bad and you need to always, always read the paperwork before signing on the dotted line. This goes doubly if your parents are considering a reverse mortgage and you’re going to be helping them deal with their finances as they age.
Reverse Mortgages and Their Bad Reputation
When reverse mortgages were first becoming fairly popular, banks willing to make the loans proliferated. And so did con artists who took advantage of an aging population made of people who were often desperate to hold on to their homes or simply were medically incapable of understanding the consequences of the monthly payment they’d receive.
This was good for no one but the scammers. That’s why a whole lot of legislation has been written to remedy these kinds of situations.
How Do Reverse Mortgages Work?
Unique features of a reverse mortgage are best explained by a comparison to traditional forward mortgages. In a forward mortgage, the borrower makes monthly payments to the lender, gradually reducing the loan balance and building equity. With a reverse mortgage, the borrower receives payments from the lender and does not need to make payments back to the lender so long as he or she lives in the home and continues to fulfill his or her basic responsibilities, such as payment of taxes and insurance. The loan balance grows over time as the borrower receives payments and interest accrues on the loan. Essentially, the mortgage works in the reverse direction of a forward mortgage, which is where the term “reverse” comes from.
For example, if you have a house valued at $500,000 and only owe $100,000 you have $400,000 in equity built up that you can then use a reverse mortgage to make those funds available to you.
Reverse Mortgage Payment Options
One of the best things about a reverse mortgage is the money that comes back into the pocket of the borrower. You or your parents can choose how that money is distributed, too. Essentially, you have three options: taking a lump sum, taking a monthly payment or using it as a line of credit. There are also ways to mix and match these, so you might take a percentage as a lump sum for that flashy convertible and the rest as a line of credit to use as you need to fill up on gas.
For a lot of seniors, a reverse mortgage will allow them to age in place without fear of losing their home (provided they keep up with the taxes and insurance). This can be a great option as long as the source of the funds is fully vetted, all the paperwork is in order and read from top to bottom and they have a plan to make the money last as long as possible.
Reverse Mortgage Closing
The good part is that reverse mortgages are now heavily regulated by the government, so it’s much harder to scammers to take advantage of older people who may be having money problems already.
They don’t require a credit pull or even decent credit. You just need a home that’s free and clear, or has a significant amount of equity, and be 62 or older. You’ll pay some fees upfront and be required to complete HUD-approved counseling (you will pay a fee for this, too) that will help you determine if you’re really a good fit for a reverse mortgage.
If you happen to die while you still own the house, your heirs have the option to redeem it from the reverse mortgage lender by paying off the borrowed amount in full. To find out if a reverse mortgage is right for you, contact your lender and they will get you on track to living comfortably again.