Reverse Mortgages - What’s the catch?
I hear that a lot, reverse mortgages sometimes sound too good to be true. ";You mean the bank will give me a loan that I don’t have to pay back until I die? Come on, really? How do they make any money? There’s got to be more to the story!"; .... and there is.
A Reverse Mortgage is a loan, period. It does have to be paid back, with interest and fees, however the way in which the loan is set up can make it a good option for some senior homeowners.
Think about it like this - with a regular mortgage, say you borrow $100,000 at 5.5% against your home and every month you make a payment to them of $567.79. That includes principal and interest. The majority of the monthly payment in the first half of a 30 year mortgage goes to interest as we all know, but you do see the balance of your loan going down every month when your statement comes in. You might even complain to your spouse about how much of the payment went to interest and that your balance isn’t that much lower - but eventually after 30 years you’ve paid back the loan the entire $100,000 in principal and another $104,400 in interest.
With a reverse mortgage, you might borrow $100,000.00 at a fixed 5.5%* against your home and every month you do NOT make payments. Instead, the interest “accrues” to the balance, so every month your balance goes up. Yep, that’s the catch - your balance is going up. How is that a good thing?
It’s good in the sense that if a senior homeowner is planning to remain in their home for the foreseeable future, they may benefit from the increase in cash flow that a reverse mortgage provides. Here are two ways:
- The senior already has a mortgage that they are paying on and still have quite a long time to go - every month that mortgage payment takes away from their income. The reverse mortgage would be used to payoff the existing mortgage, freeing up that monthly mortgage payment and giving the client a net increase in their monthly cash flow.
- The senior owns their home free and clear, and chooses to take a reverse mortgage on an adjustable rate and elects to have the loan “pay him” with monthly (tenure) payments. In that case the homeowner will receive a payment every month from the lender. The starting balance would be low to start (just fees) then grow each month by the amount of money sent to the homeowner, plus interest. As long as the borrower remains in the home, those payments will continue.
Once the homeowner leaves the home permanently, due to sale, death or sickness - the loan becomes due. Yes, the homeowner can still sell their home if they want, they could even refinance a reverse, but they must live in the home, maintain the home and pay the property taxes on time.
Now you know the “catch” and with advice from qualified, trusted advisers and family you can make an decision that lets you sleep at night. There is a lot more to learn (New HECM Saver, Adjustable vs. Fixed, Payment Options, Fees &; Costs) - so I hope you will subscribe to my blog and check out my links.
For more detailed information about reverse mortgages you can give me a call or do some learning online here at my blog, or at HUD, other agencies. You can download this free booklet from the National Council on Aging. There’s lots of good information out there.
*This is not a quote on fixed rates for reverse, but is about right where rates are at the time of this posting. This post contains my own thoughts and opinions and does not necessarily reflect the thoughts and opinions of my employer.