For older Baby Boomers with a free and clear home mortgage
or a home with substantial equity, a reverse mortgage may be
the answer to enjoying extra income without having to make
additional payments while also removing current mortgages.
Reverse mortgages were conceived as a means to help people
in or near retirement and with limited income use the money
they have put into their home to pay off debts (including
traditional mortgages), cover basic monthly living expenses
or pay for health care. There is no restriction on how a
borrower may use their reverse mortgage proceeds. The
advantages of a reverse mortgage are many:
You can qualify without income or credit requirements
Typically eliminates current mortgage payments
No payback required as long as you continue to live in your
A reverse mortgage is a form of equity release (or lifetime
mortgage). It is a loan available to home owners or home
buyers over 62 years old, enabling them to access a portion
of the subject home's equity. The home owners can draw the
mortgage principal in a lump sum, by receiving monthly
payments over a specified term or over their (joint)
lifetimes, as a revolving line of credit, or some
Title to the property remains in the name of the homeowners,
to be disposed of as they wish, encumbered only by the
amount owing under the mortgage.
If a property has increased in value after a reverse
mortgage is taken out, it is possible to acquire a second
(or third) reverse mortgage over the increased equity in the
home in some areas. However most lenders do not like to take
a second or third lien position behind a reverse mortgage
because its balance increases with time. It is rare to find
reverse mortgages with subordinate liens behind them as a
result. A reverse mortgage may be refinanced if enough
equity is present in the home, and in some cases may qualify
for a streamline refinance if the interest rate is reduced.
A reverse mortgage line is often recorded at a higher dollar
amount than the amount of money actually disbursed at the
loan closing. This recorded lien is at times misunderstood
by some borrowers as being the payoff amount of the
mortgage. The recorded lien works in similar fashion to a
home equity line of credit where the lien represents the
maximum lending limit, but the payoff is calculated based on
actual disbursements plus interest owing.
There are three types of reverse mortgages: (the least
expensive) single purpose reverse mortgage, HECM or Home
Equity Conversion Mortgages, and private proprietary reverse
mortgages. The most popular programs are the HECM loans that
are backed by HUD with FHA mortgage insurance.
If you’re taking out an HECM reverse mortgage, you’re
required to talk to a counselor designated by the federal
government. You will find out soon enough that if you aren’t
careful, reverse mortgages can negatively impact your
finances. Your credit consultant should be sure to point out
to you all the cons, disadvantages and pitfalls of reverse
mortgage loans along with all the costs and fees. Having to
talk to a credit adviser can seem like a great disadvantage
but in the end it will serve as benefit and can be
considered a check on your list of pros.
The federal government has quoted these disadvantages and
pitfalls of reverse mortgages:
They can affect your eligibility for another type of loan.
This may affect the inheritance of the borrower’s heirs.
The borrower could lose his or her eligibility for Medicaid
and Supplementary Security Income (SSI).
Baby Boomers interested in a reverse mortgage are urged to
educate themselves on the types of mortgages and payouts
available, associated costs and the pros and cons of each. A
good place to start is
National Reverse Mortgage Lenders Association.