Reverse Mortgages

Maybe you’ve been seeing commercials on late-night TV lately asking “Is a reverse mortgage right for you?” and then offering vague ways to go and get one. What are they talking about anyway? They’re talking about borrowing against the equity on your home to get a lump sum cash payment, a line of credit, or installment payments of cash. According to the Wall Street Journal, reverse mortgages have risen from 3,875 in 2010 to 10,512 last year—at least the ones sponsored by the U.S. Department of Housing and Urban Development (HUD). HUD and its organizations account for 95 percent of them, and they’re formally known as the Home Equity Conversion Mortgage (HECM) program.
 
Now, you might be wondering how is a reverse mortgage different from a home equity loan? Well, it has certain rules attached. You have to be at least 62, you have to own your home outright or have a small mortgage balance that could be paid off using the loan, and you must live in the home. Also, you can’t borrow against all of the equity. If you’re 62, you can borrow 62 percent of it. If you’re 80, you can borrow up to 72 percent. Also, you don’t have to pay back an HECM loan unless you leave the residence or fail to make whatever mortgage payments you still may have.
 
So how do you know if you should go out and get a reverse mortgage?
 
The pros are: the loan is not taxable by the IRS, Social Security and Medicare benefits are not usually affected, the borrower keeps the title to the house, and no repayment of the loan has to be made unless the borrower moves out or dies.
 
The cons: it can cost up to $8,000 in fees to set up a reverse mortgage (compared to $5,000 or under for a traditional mortgage), compound interest mounts (which doesn’t leave funds if the borrower wants to move into an assisted living facility or leave money to heirs), interest rates are not fixed, the borrower can default on loans if certain conditions in the loan contract aren’t met (example: the upkeep of the house is neglected), and borrowers can’t deduct the loan interest on their tax return, unless the loan is paid back in part or in full.
 
If you want to know more, HUD has a FAQ about reverse mortgages.
 
But just think, if you’re 62 and live in this townhouse (listed for $1,429,500) in New York, you could get a reverse mortgage for around $886,000. Not too shabby.