Be Really Smart About Reverse Mortgages
Reverse mortgages are a double-edged sword. On the one hand, they can provide a steady income in your retirement. But on the other hand, a reverse mortgage loan is just that — a loan — with many of the associated downsides.
How Do Reverse Mortgages Work?
A reverse mortgage is a type of loan only available to people aged 62 and older. When you take out a reverse mortgage, you convert your home equity into cash. Instead of you making monthly payments like with a traditional mortgage, the lender pays you monthly.
To be eligible for a reverse mortgage, the property must be your primary residence. You keep the title to the property but also remain responsible for paying property taxes, homeowners insurance, and maintenance.
Reverse mortgages aren’t free money. The loan balance, plus the origination fees and accrued interest, become due when you:
- Move out
- Sell the property
- Fail to comply with the loan terms
- Pass away
If you don’t pay the money back, the lender sells the home.
Types of Reverse Mortgages
There are three main types of reverse mortgages:
- Proprietary reverse mortgages are offered and insured by private lenders and are not backed by the government.
- Home equity conversion mortgages (HECMs) are government-backed loans insured by the Federal Housing Association (FHA). They have loan limits and other borrower protections not available with proprietary reverse mortgages.
- Single-purpose reverse mortgages enable you to borrow for one lender-approved purpose, such as a home renovation project. These loans are offered and backed by certain state and local government agencies and non-profits.
Is a Reverse Mortgage Right for You?
If you’re considering a reverse mortgage, keep these in mind:
- You can benefit from an income boost: A reverse mortgage can provide a monthly financial injection toward your retirement expenses.
- You can preserve your retirement savings: You may be able to hold off on collecting Social Security. Every year you delay past your full retirement age and until age 70 translates into an 8% benefits increase.
- You don’t risk personal liability: If you default, the only thing at risk is the property — even if the loan balance exceeds the value of your home.
- You must occupy your home: This can prevent you from moving out if you’d like to downsize, move closer to family, or transition to assisted living.
- You’ll have expenses: You must pay property taxes, homeowners insurance, and maintenance costs.
- You might not keep the home in the family: Your children might not inherit the property if you don’t pay off the loan before you pass away.
- You may be stuck with a high interest rate: Rates are typically 1-2% higher than with regular mortgages. They are also non-deductible and often variable.
Thinking About a Reverse Mortgage? Talk to a Maryland Real Estate Attorney First
At The Law Office of Ralph W. Powers, Jr., P.C., we have decades of experience in real estate law. Our attorneys can answer your questions about reverse mortgages and help you build a financial strategy for your retirement.
We serve Upper Marlboro and all of Southern Maryland. Call 301-627-1000 or contact us online to schedule a consultation.