Is a Reverse Mortgage Right For Me?

People ages 62 or over may stand to benefit from a reverse mortgage, but it’s not for everyone, as the Federal Trade Commission (FTC) is fast to point out. Reverse mortgages have several distinct advantages, including the fact that the proceeds are generally tax-free and do not affect Social Security benefits. This type of mortgage also has some drawbacks to consider prior to signing on the dotted line.

What is a Reverse Mortgage?

A reverse mortgage is aptly named. It is a type of mortgage that lets you convert part of your home’s equity to cash without selling the home or committing to a monthly payment for a second or third mortgage. So instead of paying a lender each month like you would in a traditional mortgage setup, you receive monthly payments from the lender or, in the case of one type of reverse mortgage, the lender pays you in a single cash disbursement or in a combination of a line of credit and monthly payments.

Reverse Mortgage Types

Three types of reverse mortgages are available, including the single-purpose reverse mortgage, the proprietary reverse mortgage, and the federally insured reverse mortgage. The latter of these is also called a Home Equity Conversion Mortgage, or HECM.

The single-purpose reverse mortgage is generally offered by a government agency or nonprofit and is not widely available in all areas of the country. As its name hints, this type of mortgage generates proceeds that are only usable for a single purpose, such as paying property taxes, making home improvements, or repairing the home. The proprietary reverse mortgage is a type of private loan, backed by a private company. This type of reverse mortgage often allows for larger loan advances than other reverse mortgage types.

The HECM is backed by HUD. It can be used for any purpose the homeowner sees fit. The amount of money that a homeowner can access when taking out the HECM depends on the borrower’s age, the home’s appraised value, the homeowner’s financial fitness, and the prevailing interest rate when the mortgage is written.

Considerations for a Reverse Mortgage

Reverse mortgages can be advantageous for certain borrowers under certain circumstances. Before shopping around for a reverse mortgage, you need to know that:

• There are upfront and ongoing costs to consider. From origination fees to servicing fees and mortgage insurance premiums, the costs associated with a reverse mortgage can be substantial. For instance, if you take out an HCEM with a 2 percent mortgage insurance premium, this means that you will pay 2 percent of the value of the loan as well as an ongoing annual premium.
• You’ll have less home equity. The reverse mortgage effectively reduces the equity you have in your home. This means that the home has less value to you and your children or other heirs as an asset.
• Taking a reverse mortgage can affect eligibility for Medicaid. Many seniors rely on Medicaid to help them with medical costs during their golden years. A reverse mortgage can possibly affect your ability to receive this vital help if you need it.

Reverse mortgages can be convoluted and hard to understand. Speak with a financial advisor to see if this type of financing is right for you at this stage in your life.