Is a Reverse Mortgage a Ripoff?

What You Need To Know About Reverse Mortgages

 Mature person looking at paperwork while seated at a laptop.
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Reverse mortgages are special types of loans that give older homeowners a way to turn their home equity into a source of income they can use during retirement. When they move out or die, the lender usually takes and sells the home to repay the loan.

There are some benefits to reverse mortgages, but there also are some significant downsides to keep in mind. While they might not be a ripoff, reverse mortgages are not for everyone.

Key Takeaways

  • Reverse mortgages give older homeowners a source of income based on their home equity.
  • Typically, lenders take the home to repay the loan balance once the homeowners move out or die.
  • The amount of money you’ll receive depends on your age, home equity amount, and market interest rates.
  • The reverse mortgage industry is rife with scammers, so it’s important to do your due diligence.

Pros and Cons of a Reverse Mortgage

Pros
  • You can still live in your home while you have the reverse mortgage

  • No payments

  • Turn home equity into a source of cash or income

  • The income is tax-free

  • Your risk is limited, in some cases

Cons
  • Reverse mortgages come at a cost

  • May not get as much value out of your home

  • Restrictions on what you can do with your home

  • Risk of foreclosure

Pros Explained

  • You can keep living in your home while you have the mortgage: If you want to sell your home to get equity out of it, that usually means you can’t live in it anymore unless you rent from the new owners. Reverse mortgages let you stay in your home.
  • No payments: Other ways to get equity out of your home, such as a home equity line of credit or loan, involve monthly payments. You only repay a reverse mortgage when you move out.
  • Turn home equity into a source of cash or income: With a reverse mortgage, you can convert your home equity into a regular stream of income that you can use to pay other expenses.
  • The income is tax-free: Because the money you get from a reverse mortgage is considered proceeds from a loan, you don’t pay taxes on it.
  • Your risk is limited, in some cases: If you get a Federal Housing Administration (FHA)-insured reverse mortgage, your risk is limited. At the end of the loan, if the lender takes your home and it is not worth enough to pay off the outstanding balance, the government will cover the remainder.

Cons Explained

  • Reverse mortgages come at a cost: It’s easy to forget that reverse mortgages are loans, which means interest will accrue over time. You also have to pay lender fees such as origination fees.
  • May not get as much value out of your home: If getting the most value out of your home is the goal, reverse mortgages won’t help. The ongoing fees and interest typically mean you’ll get less than if you’d sold the home.
  • Restrictions on what you can do with your home: When you obtain a reverse mortgage, the loan lasts for as long as you keep living in the home. If you want to move, spend a significant amount of time elsewhere, or need to go into a nursing home or care facility, you might be forced to sell the home.
  • Risk of foreclosure: When you get a reverse mortgage, you agree to keep the house in good condition and pay required costs, such as property tax and insurance. If you fail to meet your end of the agreement, the lender could foreclose on you.

Spotting Reverse Mortgage Scams

Reverse mortgages are targeted at older homeowners. In fact, you have to be at least 62 to be eligible for an FHA-insured reverse mortgage.

Unfortunately, that means that reverse mortgage scammers looking to prey on the elderly are fairly common. It’s important to protect yourself from scams.

Some scammers are easy to spot. Anyone using high-pressure sales tactics or trying to convince you to sign documents without letting you read them carefully or consult an attorney are likely scammers that you should avoid.

However, some scammers are less obvious.

Some scammers may try to steal your identity and apply for a reverse mortgage in your name without your knowledge or permission. Contractors might also recommend one to you as the best way to pay for home repairs, only to direct you to an unsavory lender.

It’s essential that you do your own research and due diligence, read documents carefully, and make sure you’re working with a trustworthy lender.

Should You Get a Reverse Mortgage?

Reverse mortgages can be a good idea for some homeowners, but they aren’t for everyone.

When It Makes Sense

Reverse mortgages can be a good choice for certain types of homeowners.

For example, if you plan to stay in your home for a long time and have no expectation of moving or spending large amounts of time in a second home, a reverse mortgage can be a good way to get cash out of your home. 

This is especially true if you’re very tight on funds and can’t afford to make payments on something like a home equity loan—or just need more income to pay for necessities.

Reverse mortgages can also be a good choice for people with poor credit. They can be easier to qualify for than other types of loans that often require stronger credit scores.

When It Doesn’t Make Sense

Reverse mortgages might not be the right choice for some people.

One scenario where one would be a bad idea is if you own multiple homes and split time among them. You can only get a reverse mortgage on a primary residence. If it’s tricky to prove which of your homes is your primary residence, you might face foreclosure.

If you have heirs to whom you want to leave your home after your death, a reverse mortgage is also a bad idea. While they’ll have the option to pay off the loan and keep your home, it can make the process messy, so it’s easier to avoid the reverse mortgage in the first place.

Further, you should avoid a reverse mortgage if someone other than your spouse lives with you. While qualifying spouses can stay in the home after you move out or pass away, other family members and roommates don’t get that protection if they’re not co-borrowers.

Alternatives to Reverse Mortgages

If a reverse mortgage isn’t right for you, there are other ways to get equity out of your home.

Home Equity Loan

A home equity loan uses the equity you’ve built to secure a loan. Like most typical loans, you get a one-time, lump-sum payment that you can use for almost any purpose. This makes these loans a good choice for people who have a one-off expense to cover but don’t need a stream of income.

Home Equity Line of Credit

Home equity lines of credit, or HELOCs, let you pull cash out of your home when you need it, up to a set limit. You only make payments and pay interest on the amount you’ve borrowed, similar to a credit card.

HELOCs can be useful for homeowners who might need multiple cash infusions because they let them avoid having to apply for a new loan each time they need cash.

Move to a Smaller Home

Many older homeowners are able to downsize their homes. For example, if you originally needed a larger home to house children who have grown up and moved out, you might have the option to move to a smaller house now.

If you sell your home and buy one that’s less expensive, you can use the extra proceeds to cover your expenses.

Frequently Asked Questions (FAQs)

How do you get out of a reverse mortgage?

Homeowners have at least three business days after closing on the loan to cancel it. You can also get out of the loan by paying it back or selling your home.

How old do you have to be for a reverse mortgage?

To qualify for a reverse mortgage insured by the FHA, you must be at least 62.

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Article Sources

  1. Consumer Financial Protection Bureau. “What Is a Reverse Mortgage?

  2. IRS. “For Senior Taxpayers.”

  3. Consumer Financial Protection Bureau. “You Have a Reverse Mortgage: Know Your Rights and Responsibilities,” Page 12.

  4. U.S. Department of Housing and Urban Development. “How the HECM Program Works.”

  5. Consumer Financial Protection Bureau. “What Happens if I Have a Reverse Mortgage and I Have to Move Out of my Home, Such as Moving Into a Nursing Home or to Live With Family?

  6. Consumer Financial Protection Bureau. “What Should I Do If I Have a Reverse Mortgage Loan and I Received a Notice of Default or Foreclosure?

  7. Consumer Financial Protection Bureau. “Avoid Reverse Mortgage Shopping Scams.”

  8. Consumer Financial Protection Bureau. “Reverse Mortgages: A Discussion Guide,” Page 15.

  9. Consumer Financial Protection Bureau. “What Is a Home Equity Loan?

  10. The Federal Reserve Board. “What You Should Know About Home Equity Lines of Credit,” Pages 3-4.

  11. Federal Trade Commission. “Reverse Mortgages.”