 Reverse can be good. It’s good when you’re driving, and you need to back up. In football, a reverse–one running back going one direction hands the ball to another going the opposite direction–can sometimes fool the other team. When a judge decides to reverse a ruling, you can bet someone is glad about it.
In short, reverse means doing the opposite of what’s considered "normal." So it is with home mortgages. With a reverse mortgage, the lender pays you.
A reverse mortgage is a unique loan that enables senior homeowners 62 and older to convert part of the equity in their home into tax-free income without having to sell the home. Homeowners do not give up title or take on a new monthly mortgage payment.
"Reverse mortgages probably are good deals for those who need them," says Jack C. Harris, research economist for the Real Estate Center at Texas A&M University. "Although most people do not pay them back personally, they still are borrowed money–like any other mortgage."
A reverse mortgage enables older homeowners to access a portion of their home equity, normally between 33% and 55%, tax free. The borrower retains title to the property, but the lender places a lien on it. After the loan is repaid, the remaining equity in the home goes to the borrowers or their heirs.
Harris says that, like every mortgage variation, reverse mortgages have a downside. They often involve large fees and charges that are added to the loan. This may include an annuity from an insurance company.
"Some homeowners would probably be better off if they moved and no longer had the responsibilities associated with homeownership, such as maintenance and cleaning."
Nevertheless, with their homes going up in value and interest rates running at historic lows, greater numbers of older Americans are turning to reverse mortgages to pay for home improvements, medical expenses, fun and travel, daily living expenses, to pay off existing debts, or for other needs.
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The loan doesn’t have to be repaid until the surviving spouse dies, sells the home, or vacates the home for 12 consecutive months.
More than 8,500 Home Equity Conversion Mortgages (HECMs) were insured by the Federal Housing Administration during the eight months ending May 31, 2002. Fewer than 5,100 were closed during the same period a year earlier. Texas, California, and New York lead all states making reverse mortgages.
Reverse-mortgage payments come in different forms: as a single lump sum, as monthly payments for as long as the borrower lives in the house, or as monthly payments for a specific time. As a general rule, the older you are, the larger the reverse mortgage benefits are.
"Realistically, the best results normally occur when both borrowers are over 66 and own a home valued at over $66,000," says Scott Norman, one of the top reverse mortgage originators in the United States and former executive director of the Texas Association of Reverse Mortgage Lenders. "The home should be at least 70 percent paid off. The entire process takes four to six weeks."
Reverse mortgages are available at various levels of government and through the private sector. An application fee usually includes the cost of an appraisal and a credit report. Other costs may include an origination fee, closing costs, insurance, and a monthly service fee. These costs generally can be added to the loan balance.
According to Realty Times, if you’re older than 62 and plan on selling your home in the near future, a reverse mortgage probably isn’t the answer. In such a case, you might be better off selling your current home and buying a less expensive house or taking out a home equity loan. AARP offers a calculator on its Web site to help determine whether a reverse mortgage is beneficial.
Before applying for a reverse mortgage, borrowers must get mandatory counseling from either their local Consumer Credit Counseling Service, local housing agency or from a Fannie Mae reverse-mortgage counselor. Fannie Mae’s toll-free number is 1-800-732-6643, extension 1480. The counseling normally takes about 45 minutes.
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