Reverse mortgages pose risks beyond losing homeownership, including eroding home equity, accruing high fees, and limiting inheritance. Interest compounds, potentially leading to significant debt. Borrowers must maintain taxes and insurance or risk foreclosure. Consider these factors carefully.
Suze Orman's opinion on reverse mortgages
She has spoken out against these loans on numerous occasions, warning that they can be a risky financial decision for many older Americans. One of Suze's main concerns with reverse mortgages is that they can be incredibly expensive.
Since you aren't required to repay the loan before the maturity date, interest keeps accruing and can end up being a significant cost. That's because interest is compounded, meaning you pay interest on the interest.
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
If your reverse mortgage loan is in default and you've received a notice that the loan is “due and payable,” you may sell your home for 95 percent of its appraised value.
A reverse mortgage usually must be repaid when the borrower moves out for 12 consecutive months or more, such as into a nursing home or other care facility. If the borrower is married, their spouse can remain in the home under certain conditions.
Alternatives to a reverse mortgage include home equity loan, home equity lines of credit, and cash-out refinances. These financial products can help you tap the equity in your home to use as cash for other purposes.
If the end of your term is up before you pass away, then you have outlived your reverse mortgage proceeds. With a term payment plan, you reach your loan's principal limit—the maximum you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.
A reverse mortgage may be a good idea if:
You and your spouse/partner are both 62 or older. You are in a strong financial position. You are able to physically maintain your home.
Reverse mortgages are extremely expensive and should only be used as a loan of last resort. Borrowers must pay both upfront and ongoing fees. The ongoing costs are often financed into the loan and seniors may be unaware of just how quickly the fees add up.
If you wish to keep the home, but the amount owed on the reverse mortgage is more significant than the current value, you have the right to pay off the loan at an amount of the existing loan balance or 95% of the current market value, whichever is less.
What is a reverse mortgage LESA set aside? The LESA is a Life Expectancy Set Aside. These are funds set aside from your line of credit and not made available to you that the servicer uses to pay your taxes and insurance when due.
How Much Money Do You Get From a Reverse Mortgage? The amount of money you can borrow depends on how much home equity you have available. You typically cannot use more than 80% of your home's equity based on its appraised value. In 2023, the maximum amount anyone can be paid from a HECM reverse mortgage is $1,089,300.
Who is not a good candidate for a reverse mortgage? A reverse mortgage is a questionable proposition if you have sufficient income to pay your bills or are willing to sell your home to tap into the equity. If that's the case, it may make more sense to just sell it and downsize your home.
Sometimes life changes, and the home you thought was going to be permanent doesn't fit your needs anymore. Someday you may want or need to move closer to family, into a senior community, or an assisted-living facility. With a reverse mortgage, you own your home and it's yours to sell whenever you wish.
You're still responsible for paying property taxes and insurance, and if you default on your property taxes, you could lose your home to tax foreclosure. A reverse mortgage lender can foreclose on the home if you're not living in it for more than 12 consecutive months due to health care issues.
The 60% Utilization Rule
Home equity conversion mortgage HECM borrowers may only take the greater of 60% of their total available equity or the total amount of their mandatory obligations plus 10% in the first payout.
With a reverse mortgage, the title of the home remains in the borrower's name. Proceeds from a reverse mortgage can be used as a down payment on a second home in some cases , or help supplement retirement income to cover monthly expenses. There is virtually no restriction on how the borrower uses their loan proceeds.
If you're a homeowner aged 62 or older, a reverse mortgage can help you obtain tax-free income, allowing you to stay in your home, pay bills, supplement your income and more. A reverse mortgage isn't free money: The borrowing costs can be high, and you'll still need to pay for homeowners insurance and property taxes.
Although the proportion of eligible older homeowners using reverse mortgages has been increas- ing rapidly, that proportion is only 1.4 percent at present. In this paper, we analyze reverse mortgage loans in a rich structural life-cycle model of retirement.
Traditional reverse mortgages limit how much a borrower can receive in the first year to 60 percent of the total loan amount. With a jumbo reverse mortgage, borrowers can receive 100 percent of the total loan amount in the first year.
Under reverse mortgages and traditional home mortgages, a property will serve as collateral when a borrower violates their end of the loan agreement. Only in this situation can a reverse mortgage company or bank take your home.
You remain eligible, whether or not you have a reverse mortgage. Social Security isn't typically affected by a reverse mortgage loan because it is a government-based program, primarily based on contributions you and/or your spouse made during your years in the workforce.