Whether your older loved one is looking into opportunities to downsize, or intends to stay in their current home while refinancing or making modifications, the right loan can help them make their housing goals both affordable and sustainable. Reverse mortgages are one avenue you and your loved one may want to consider when looking at potential loan options.
What are reverse mortgages?
Reverse mortgages are loans designed for homeowners aged 62 and older. Like typical mortgages, reverse mortgages allow homeowners to borrow money from a lender using the equity of their home—or the share of their home that has already been paid off—as security for the loan. The homeowner is still responsible for the property taxes, insurance and maintenance on the property. Reverse mortgages are generally considered a sound loan option for those who have good equity from paying off either all of or a significant portion of their home, but do not have enough resources to meet their current needs. Some lenders will also allow the purchase of a new home using a reverse mortgage.
What to know about the Home Equity Conversion Mortgage (HECM)
The HECM is the most common kind of reverse mortgage. It is the only reverse mortgage insured by the Federal Housing Administration (FHA), which is part of the U.S. Department of Housing & Urban Development (HUD). FHA-approved lenders offer HECMs following eligibility rules outlined by HUD, so your loved one will need to talk to an HECM counselor first to make sure they and their property meet the requirements. The HUD website provides a locator you and your loved one can use to find counseling services in your area.
Some advantages of HECMs include:
- Credit requirements for this kind of reverse mortgage are less strict than other equity loans
- Interest rates are not based on credit history
- There is no time limit on how long your loved one can keep the loan before paying it back
- The funds available from a HECM line of credit increase over time
- Your loved one can continue to own their home and cannot be forced to leave so long as they continue to remain on the property, keep it in good condition and pay for taxes and insurance
- Your loved one will never have to repay more than the initially determined value of their home if they sell the property or repay the loan
However, there are some disadvantages to consider as well:
- Your loved one must keep the home in good repair and continue to keep up on taxes and insurance, which may be difficult as they age
- Closing costs for a reverse mortgage can add up to a large amount
- Both interest and mortgage insurance are added to the loan, so the amount owed will increase over time
- Any heirs may not receive much value from the home after your loved one passes
Should my loved one get a reverse mortgage?
Reverse mortgages can be complex, and your loved one should not make such an important choice without first talking to an experienced housing counselor. After determining whether or not your loved one is eligible, be sure to:
- Assess whether your loved one fully understands how reverse mortgages work, and what their responsibilities and obligations will be if they move forward with signing the loan. If your loved one still has any confusion, continue to work with a housing counselor for more clarity and education.
- Explore other options to see if a reverse mortgage is the best path for your loved one, or if another option suits their situation better.
- Discuss any issues and concerns with the housing counselor and plan ahead for solutions before signing any loans.
By: Julie Hayes, MS, Content Manager at Benjamin Rose Institute on Aging, and Sonya Edwards, Principal Broker and Executive Director of Branches Real Estate, a subsidiary of Benjamin Rose Institute on Aging.