Reverse Mortgages—What are they? How do they work?

A survey by the Urban Institute found that 1.9 million seniors found themselves having to choose between buying food and buying medicine. The survey was conducted in 1993—a time when the economy was booming! Due to the current economic woes, it is more difficult than ever for seniors to make it on their own.

“More and more, lending institutions found retirees unable to make their mortgage payments. As medical expenses and inflation hit, selling their home seemed the only option. As a cash-flow solution and to help seniors remain in their homes, lenders created the reverse mortgage loan,” explains Dave Parker, a Phoenix Loan Officer, who works primarily with reverse mortgages for retirees.

The first reverse mortgage closed in 1961. In 1989, Congress stepped in to regulate the trade and establish a government-insured version of the loan. Since 1990, the number of reverse mortgages has increased nearly 50 percent per year.

“Reverse mortgages allow homeowners to tap into the value of their homes in the amount of a loan determined by an equation that factors in the owners' age, life expectancy and the value of their property,” said Nancy West, a spokeswoman for the U.S. Department of Housing and Urban Development (HUD). When the homeowner dies, moves to an assisted living facility, moves in with relatives, and/or the home is sold, the lender is paid in full, with any money left over going to the homeowner or his estate. Nearly all reverse mortgages, also called Home Equity Conversion Mortgages (HECM’s), are insured by FHA, a branch of HUD. If the home’s value is less than the mortgage when the home is sold, the lender is paid in full and the government (FHA, insurer) eats the loss.

Reverse mortgages are available to individuals 62 and older. Proceeds are tax free and can be collected in a variety of ways: lump sum; monthly payments; and/or an expanding line of credit. There are no monthly payments. Neither assets nor an income is needed to qualify, nor is one’s credit rating a consideration, and the owner maintains title throughout the life of the loan.

To protect senior consumers, after filing an application for a reverse mortgage with a qualified loan officer, a consult is required with a counselor employed by a non-profit or public agency. “Reverse mortgages may be the only product in the country that requires counseling before you purchase it, [and] that both counselors and lenders must be approved by HUD,” continues Bell. “You should . . . be very forthcoming so that the counselor can help you [make] sure that a reverse mortgage is really the answer for you,” advises Peter Bell, President of NRMLA.

“Reverse mortgages can be a perfect solution for some, but they are not for everyone,” states Parker. “For instance, it’s not a good idea unless you plan on living in the home more than 4 or 5 years after securing the loan. It’s actually only beneficial for about a third of the people I talk to. If I don’t think the loan is right for them, I will not do the loan. I’ve never done a loan I didn’t believe was in the best interest of my clients.”