Reverse mortgages no longer something to fear

By Bill Radford July 25, 2021 | updated 5 years ago

When reverse mortgages are mentioned, the reaction is often similar to offering someone toxic waste.

In the past, that reaction had some validity. But now the reasons for hating reverse mortgages have been mitigated or eliminated entirely, and FHA and HUD even regulate many of these offerings.

A reverse mortgage allows a homeowner over 62 to borrow against the equity in their home. The reverse mortgage then becomes due when the borrower moves out or dies.

Nathan Johnson, a specialist in reverse mortgage lending (www.todays reversemortgage.com) warns that if the lender is put on the title as a co-owner, “that’s not today’s reverse mortgage,” and he recommends you find a different reverse mortgage.

Rather than requiring that payments be made like a conventional mortgage, a reverse mortgage doesn’t require payments. The interest on the loan is just added to the amount of the loan.

How much can be borrowed on a reverse mortgage is based on the age of one of the borrowers and the appraised value of the home. The borrower — or at least one of the borrowers if it’s a couple — must be at least 62. The older the borrower, the larger the percentage of the appraised value the reverse mortgage might provide.

For instance, a 62-year-old might qualify for 45% of the appraised value of a home, while an 82-year-old might qualify for as much as 65%. The amount advanced also will be after fees and closing costs.

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The interest rate might be floating or fixed, with fixed rates currently running in the 3% to 5% range. A reverse mortgage isn’t like a home equity line of credit, which often is in addition to a primary mortgage. And most lenders won’t provide a home equity loan against a home that has a reverse mortgage.

Reverse mortgages are generally intended for a primary residence, not a vacation home or a rental property. The lender probably will require the borrower to confirm that the home is a primary residence at the time the mortgage is made and might require periodic confirmation that it’s still the primary residence.

When the borrower moves, and if there is still equity in the home, it goes to the borrower. If not, the mortgage company doesn’t pursue the borrower — or the borrower’s estate — for the difference.

There are a couple of primary types of reverse mortgages. One gives proceeds once. The other provides a line of credit. And some reserve mortgages provide some of both. The reserve mortgage might pay off an existing mortgage or might provide cash flow or funds to invest.

Next week, we’ll explore who might benefit from a reverse mortgage and which types of these loans might best fit their needs.

Linda Leitz is a certified financial planner. She can be reached at linda@peaceofmindfin.com.