Reverse mortgages have been around for quite some time. The loans are marketed toward seniors (62 or older) who own a home and are looking for extra money to pay off a mortgage or finance a home. According to the U.S. Department of Housing and Urban Development, homeowners who enroll in the reverse mortgage program enables them to withdraw home equity as a lump sum, lifetime payments or as a line of credit.
Though reverse mortgages have been given a bad name, mainly due to their high costs, new research finds that a reverse mortgage might be the better option for retirees due to changes in the FHA’s Home Equity Conversion Mortgage (HECM) program.
“Early establishment of an HECM line of credit in the current interest rate and lending environment consistently provides greater survival rates than those strategies where the line of credit is established after the investment portfolio is exhausted,” wrote the authors of the report. “We estimate that the realization of the early establishment survival advantage over last resort establishment begins to appear between 15 and 20 years after the loan origination date for real annual withdrawal rates at or above 5 percent.”
The authors added that the early establishment survival advantage in the current interest rate and lending environment is predicted to be highest for those in the following categories:
- Homeowners who have long duration of home occupancy
- Homeowners with higher real withdrawal needs relative to home value
- Higher future interest rates
- Lower future home appreciation
In order to qualify for a reverse mortgage loan, homeowners need to meet certain borrower, financial and property requirements. Among the requirements, homeowners must not be delinquent on any federal debt, have other financial resources, have a single family home, and a clean credit and financial history to name a few.
Advocates of reverse mortgages have stated that home equity is essential to retirement security for Americans, so offering reverse mortgage programs in a responsible manner would be great for seniors who are looking for extra financial help.
However, others warn of the negative consequences of carelessly opening a reverse mortgage loan. “This is a major financial decision and taking out a reverse mortgage can be very costly due to high upfront costs,” said Charee Gillins of AARP Southern California. “If you’re not careful, you could also lose your home if you fall behind on your property taxes and homeowners insurance. So we encourage people to proceed with caution and to learn as much as they can about reverse mortgages and how they work. There may be other less costly options to consider.”
Gillins added that it is also important to speak with a reverse mortgage counselor to help determine eligibility or answer any additional questions about the process.
“These loans are quite different from others,” said Gillins. “It’s important to consider whether you need this type of loan and whether you can afford to start tapping your equity now. So people should consider whether their needs are worth the high costs. If you’re not facing a major emergency, it could be worth waiting.”