Reverse mortgages have been around for nearly 20 years, but it wasn’t until the current financial crisis that they caught on. Seniors are turning to these loans to tap the equity in their homes and generate tax-free income to help them ride out hard times.
How Reverse Mortgages Help Seniors
For Frank and Carol Rider, a reverse mortgage provides a financial cushion. It gives their investments time to recover from the bear market. The Riders, both in their early seventies, borrowed about $200,000 against their New Mexico home. They used the money to pay off their traditional mortgage and to receive $1,500 monthly for the next 20 years. This income supplements their pensions and Social Security benefits. “We’re trying to maintain our lifestyle,” says Frank. The couple travels extensively year-round.
For Luther and Peggy Combs, a reverse mortgage saved their home from foreclosure. Both in their early sixties, they moved from Chicago to central Florida hoping for a comfortable life. But Luther lost his job, leaving the couple deeply in debt. Using their home equity, they paid off bills and eliminated monthly house payments. This relief made it easier for them to sleep at night.
Taking Your Reverse Mortgage With You
Reverse mortgages used to require homeowners to stay in the same house. New rules now allow seniors to use a reverse mortgage to buy a new home.
For example, imagine you own a $500,000 house in Massachusetts. You want a $400,000 home in Florida. Selling the Massachusetts home and paying cash leaves you with $100,000 in savings. A reverse mortgage on the Florida home could provide another $100,000. This doubles your available savings to $200,000.
This flexibility makes reverse mortgages useful for those who want to downsize or relocate without tying up all their cash.
How a Reverse Mortgage Works
You must be at least 62 years old to take out a reverse mortgage. Your home must be your primary residence, and any existing mortgage must be paid off or nearly paid off.
Unlike traditional loans, there are no income or credit-score requirements. You can use the money however you want. Older homeowners can borrow more: the higher the appraised home value and the lower the interest rate, the larger the loan.
Example: A 65-year-old might borrow up to 35% of a home’s value.
A 75-year-old could borrow 45%.
An 85-year-old could borrow 55%.
Payments can be taken as a lump sum, monthly cash, a line of credit, or a combination. Repayment is due only when the last homeowner moves out or dies. The loan cannot exceed the home’s market value, so heirs are never liable for extra debt.
Costs and Fees
Reverse mortgages are not cheap. You pay:
Closing costs
Loan-servicing fees
An origination fee up to $6,000
Interest over the life of the loan
Additionally, there is an initial insurance premium: 2% of the home value upfront, plus 0.5% monthly. This protects both the homeowner and lender. On a $200,000 loan, upfront costs could exceed $20,000.
Reverse mortgages make sense only if you plan to stay in your home for several years. Interest rates are currently low, and loan limits are generous, making this a potentially profitable opportunity for homeowners with high-value homes. Once you lock in a reverse mortgage, declining home values do not reduce your payouts.
