Although reverse mortgages have been around since the 1960s, its growth was slow until the late 1980s when the Federal Housing Authority Insurance Program was signed into law and the first government-insured reverse mortgage was given.1 So, we’ve all heard of mortgages, but what exactly are reverse mortgages and how do they work?
As you pay off your mortgage to the bank each month, the equity you own in your home gets larger and the amount you owe decreases. A reverse mortgage is a type of loan available to seniors in which the homeowner can borrow against the value of his or her home and no repayment is required until the borrower dies or the home is sold or refinanced. Hence, as opposed to you paying the bank each month, the bank pays you instead. However, like a regular mortgage, you’re still required to pay real estate taxes and homeowner’s insurance.
Now let’s look at the types of reverse mortgages out there2:
Federally Insured Home Equity Conversion Mortgages (HECM): These are the most popular reverse mortgages out there and the first regulated programs on the market. Since 1989, the federal government, through the Federal Housing Administration (FHA) has insured HECMs.
Jumbo Reverse Mortgages: Also known as Proprietary Reverse Mortgages, were created to serve the unmet needs of the HECM market, specifically for those with higher property values. Although not federally insured, Jumbo reverse mortgages come with similar consumer protections and benefits.
So we all know there’s no such thing as a free lunch or “free money” in our case. Eventually the loan will have to be paid off, but when?
Scenario 1: When the borrower(s) have passed away.
Scenario 2: When borrower(s) have not lived in the home for 12 consecutive months.
Scenario 3: Borrower(s) decide to sell or refinance their homes.
The reverse mortgage will then become due if any of the 3 scenarios occur. The amount due will include the money borrowed, interest, and closing costs. Usually the loan is repaid through sale of the home or some other asset if a borrower’s heir wants to keep the home. As the reverse mortgage is a non-recourse loan, the amount a borrower’s heir ends up repaying will not exceed the value of the home at the time it’s sold.
Nonetheless reverse mortgages are costing some seniors their homes. A recent NY Times article by Jessica Silver – Greenberg noted, “Some lenders are aggressively pitching loans to seniors who cannot afford the fees associated with them, not to mention the property taxes and maintenance. Others are wooing seniors with promises that the loans are free money that can be used to finance long-coveted cruises, without clearly explaining the risks.” Hence, some seniors are being forced out of their own homes due to their spouses passing away and their names not being on the deed, or various other reasons regarding the terms and conditions of the reverse mortgage that may have been misleadingly explained to them by brokers.
The articles also noted that despite the fact that reverse mortgages have declined in recent years, the default rate for these types of mortgages is at a record high of 9.4 percent, up 2 percent from a decade ago. Seniors often cannot repay the huge debt needed to save their homes and are forced out with nowhere to go.
Overall, reverse mortgages were created to help seniors stay in their homes and enjoy life, and yes, in some cases they do serve their purpose. However, there are cases where they may end up taking homes away and leaving some homeless. Reverse mortgages aren’t for everyone and it is important to be cautious and think ahead before getting one.