Like any loan, it's best to approach a reverse mortgage with caution. Knowledge is key.
Suze Orman is nothing if not passionate about her followers, and a series of calls and emails from fans seeking advice has gotten the financial guru worked up. The calls deal with reverse mortgages and whether they are a good idea.
What is a reverse mortgage?
A reverse mortgage is much like a home equity loan in that seniors can tap into the existing equity in their homes. The major difference is that a reverse mortgage is repaid with interest, only when the homeowner dies or sells the property.
What are the rules of a reverse mortgage?
Reverse mortgages are designed to help seniors find the money they need to age in their own homes. Here are the rules associated with a reverse mortgage loan:
- A homeowner must be 62 years of age or older.
- They must own the home outright or have a substantial amount of equity in it.
- The property must serve as the senior's primary residence.
- They must receive counseling from a HUD-approved reverse mortgage counseling agency. During this meeting, the counselor and homeowner will discuss eligibility, financial implications, and alternatives to a reverse mortgage.
It's risky, says Orman
If landing a traditional mortgage once felt like a breeze, the same may not be true of a reverse mortgage. Like all loan types, there are risks associated with reverse mortgages.
Taking a loan too early
The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.
Once they sell, a homeowner must repay the reverse mortgage with interest. If they're in financial distress, it will only be made worse by having a loan hanging over their head.
Not understanding how the loan works
Orman spoke of a 71-year-old listener named Carol. Carol has severe COPD and an income of only $1,500 to $1,600 per month. At the time of her husband's death, Carol had $53,000 remaining on her mortgage. When someone called her to convince her to take out a reverse mortgage, they made it seem like her financial situation would improve.
Any money owed on the original balance is deducted from the amount the homeowner can borrow, and the original mortgage is paid off. "All of a sudden, she owes $90,000 on this reverse mortgage. The house is only worth $148,000, so she's only going to get like $60,000, and she can't do anything with that now. If she simply had sold the house, to begin with, we could have figured it out from there because owning a home is expensive," Orman said.
Homeowner expenses continue -- even after a reverse mortgage
Homeownership can be expensive, even after taking out a reverse mortgage. According to the Consumer Financial Protection Bureau (CFPB), even after being approved for a reverse mortgage, a homeowner remains responsible for paying ongoing property charges. These expenses include taxes, insurance, maintenance, and repair costs.
While the idea of a reverse mortgage may seem sound, it's important to approach such loans with an abundance of caution.
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FAQs
One of Suze's main concerns with reverse mortgages is that they can be incredibly expensive. Borrowers are required to pay a variety of fees, including origination fees, mortgage insurance premiums, and closing costs. These costs can add up quickly and eat into the equity the borrower has built up in their home.
What does Suze Orman think of reverse mortgages? ›
The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.
Why people don t like reverse mortgages? ›
While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky: A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.
What is the major disadvantage of reverse mortgage? ›
A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes. Reverse mortgages can also complicate life for your heirs, especially if they don't want the home or the home's value isn't enough to cover what's owed.
What is the 60% rule for reverse mortgage? ›
Called the initial principal limit, you can only withdraw 60 percent of your available equity during the first 12 months, with the remaining equity becoming available after the first 12 months. The only exception is if your mandatory obligations exceed 60 percent of your available equity.
Why do banks not recommend reverse mortgages? ›
Reverse mortgages have extremely high fees compared with other options and are usually a bad idea for most people. They are an especially bad idea for anyone with a family home that they want to leave to their heirs.
Do people lose their homes with a reverse mortgage? ›
The loan balance grows over time, and when the borrower moves or passes away, the borrower and his estate are responsible for the repayment of the loan. However, there are still events that can lead to a borrower defaulting on the loan, which can, in turn, lead to foreclosure, resulting in you losing your home.
How many people lost their homes to reverse mortgages? ›
A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.
Who benefits the most from a reverse mortgage? ›
The reverse mortgage is most suitable for homeowners looking to remain in their home but see a need or benefit of having additional funds available. They do not want to have the burden of monthly mortgage payments in their monthly budget.
What happens if you live too long on a reverse mortgage? ›
If the end of your term is up before you pass away, then you have outlived your reverse mortgage proceeds. With a term payment plan, you reach your loan's principal limit—the maximum that you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.
AARP does not recommend for or against reverse mortgages. They do, however, recommend that borrowers take the time to become educated so that borrowers are doing what is suitable for their circumstances.
Can you sell a house with a reverse mortgage? ›
If you decide to sell your home while you have a reverse mortgage loan, you will have to pay back the money you borrowed plus interest and fees. If your loan balance is less than the amount you sell your home for, then you keep the difference.
How much money do you really get from a reverse mortgage? ›
Generally speaking, you can usually get somewhere between 40% to 60% of your home's appraised value. And the higher your home value is, the more money you can potentially access.
What to be careful of for a reverse mortgage? ›
Downsides of Reverse Mortgages
- Relatively High Fees.
- Ineligibility for Certain Government Benefits.
- Lenders Can Foreclose in Some Instances.
- Other Family Members Can Be Evicted.
- Smaller Inheritances and Greater Hassles for Any Heirs.
Unlike traditional mortgages, there's no set term length for reverse mortgages.
Can you get a 100% reverse mortgage? ›
With a traditional reverse mortgage, borrowers are not permitted to receive more than 60 percent of the total loan proceeds in the first year. With a jumbo reverse mortgage, borrowers may access 100 percent of the loan proceeds in the first year.
What is the best age to take a reverse mortgage? ›
You generally aren't eligible for a reverse mortgage until you reach age 62, and the older you are after that, the more you're often able to borrow.
At what age is a reverse mortgage a good idea? ›
Home Equity Conversion Mortgages (HECMs), the most common type of reverse mortgage loan, are a special type of home loan available to homeowners who are 62 and older. Aside from age, other reverse mortgage requirements include: Your home must be your principal residence, meaning you live there the majority of the year.
Is reverse mortgage a good idea for seniors? ›
If you do not intend to leave your house to your heirs, or you don't have any heirs in the first place, a reverse mortgage is a viable option if you are 62 or older and in need of cash. Though your heirs are not liable for the debt, if they decide to sell the house the reverse mortgage must be paid off first.
