The New York Times article, “The quiet comeback of reverse mortgages,” reports that reverse mortgages, which allow homeowners age 62 and older to tap into their accumulated home equity without facing monthly payments in return, have received a bad rap over the years because of abuses by lenders.
The volume of reverse mortgages decreased to about 30,000 this year from about 115,000 at their highest point in 2009. However, with reforms, they’re making a slight comeback and are viewed as a way of helping some retirees fill in the gaps in their future income. A reverse mortgage can provide cash or “longevity insurance” when other sources of retirement income dwindle. They also can be a source for out-of-pocket health care costs or other sudden financial needs. Similar to a conventional mortgage, a reverse mortgage obligation is met when the house is sold by the owners, the last owner has died or the home is sold by heirs. Any equity left over is kept by the last homeowner.
Also known as “Home Equity Conversion Mortgages,” these loans are insured by the government. The Federal Housing Administration makes up any debt owed from the final loan balance and net proceeds from the sale. You don’t have to worry about being “underwater” on the loan in case the home’s value is less than the mortgaged amount.
Reverse mortgages can give retirees with only modest savings but little or no housing debt the ability to stay in their homes and can provide a financial safety net for those worried about outliving their retirement funds.
A reverse mortgage can eliminate the burden of conventional housing debt, monthly payments of interest and principal, and can assure heirs that they wouldn’t be required to make up any losses if the home sold for less than the value of its mortgage.
Stricter regulation from the FHA and the Consumer Financial Protection Bureau—like mandatory counseling prior to lending—and lower costs have helped increased their popularity among seniors. Some folks don’t have enough savings to get through retirement, so they may use all of their wealth—including home equity—as a retirement income source. Others use reverse mortgages to create a cash buffer in the event a dip in the stock market depletes their retirement portfolio. Rather than selling stocks and funds when the market is down, they can use their home equity through a reverse mortgage line of credit to provide an income stream. One other rationale for seniors looking at reverse mortgages is to finance the costs of long-term care.
Although it can be a source of ready cash, a reverse mortgage isn’t for everyone. If you want to leave your home to your heirs by letting them sell your home at your death, a reverse mortgage will leave no equity in your home.
If you’re thinking about a reverse mortgage, do your homework and don’t be in a rush. Consult an elder law or estate planning lawyer for more information regarding how this might work for your situation.