For many seniors, it seems like a dream come true: a mortgage that puts money in your pocket and still allows you to keep title to your home.  But reverse mortgages can be confusing, as well as misleading to seniors that are unaware of the drawbacks.  And predators have developed techniques to take advantage of reverse mortgagors by extracting unnecessary fees or inflating interest rates.  But a reverse mortgage can be useful for seniors if they understand the process and the terms they are committing themselves to:

In a Nutshell: With a reverse mortgage, the lender will give YOU money in exchange for a mortgage on your home.  You may receive the money in one lump sum, in monthly payments during the time you live in the home, in large monthly payments for a set period, as a loan commitment you use in the future, or a combination of these options.  The mortgage on the house cannot be exercised until you die or move out.  Until then, you get to stay in your home and keep the title in your name.

To Qualify: You must be 62 or older, live in your home, and have paid off any existing mortgages on the property.  The money that will be available through this loan depends on the value of your home, the government/lender limits, your age, current/future interest rates, and lender fees.

What’s the catch? The drawback to reverse mortgages is that they are high-cost loans.  According to the AARP, the origination fees and insurance premiums could take up approximately $25,000 or more on a $250,000 house and interest charges that accrue throughout the time of the loan will be added to that!  These fees will not be due until you die or sell your house, but those charges continue to add up during the life of your loan.  And although you could possibly recoup that money if your house increases in value, there is no way to guarantee it.  To make sure that you are getting the most out of a reverse mortgage, consider the following:

Seniors who plan to stay in their home for several more years will benefit the most from a reverse mortgage.  Since there is a large start-up cost, it will become more cost effective the longer you stay there.

If you are currently collecting assistance through governmental programs such as SSI, Medicaid, or Food Stamps, check to see if a reverse mortgage would affect your eligibility to continue receiving these benefits.

A reverse mortgage should be used to live comfortably, NOT to invest or spend on big-ticket luxury items.  Remember: you will still be paying property taxes, homeowners’ insurance, and repairs on your home.

As with any major financial investment, be sure to consider alternatives to this mortgage, as well as comparison shopping to determine the best rates.  Do not jump into the first deal you are offered!

Beware of predators!  Be wary of anyone who encourages you to take out this loan to fund an investment such as an annuity, or, who offers to find you a lender in exchange for a “small percentage of the loan”.  The same information is easily available: call HUD at 1-800-569-4287 to be referred to a local housing counselor.

Find impartial help!  Contact a financial counselor to walk you through the pros and cons.  It is also wise to contact a lawyer or another trustful third party who can review your loan documents to check for problems.

Go with your gut—if a “deal” does not feel right or you realize that this loan is not for you, reconsider your options.  It is your hard-earned money and you have the right to protect it.

Mary Nienaber-Foster
Legal Intern