How equity is cashed out
With reverse mortgages, homeowners have 3 options for cashing out equity:
- Receive monthly payments.
- Get a lump-sum payment.
- Maintain a line of credit.
Many homeowners are conservative and just want to eliminate their mortgage payments, but they like having the credit line available, says Beth Paterson, executive vice president of the Reverse Mortgages SIDAC in St. Paul, Minnesota.
"Maybe they don't need the money right now, but down the line they might have a medical emergency, so it's good for them to have the option," she says.
1 borrower's experience
That was the case with Barbara Hiebert after her husband died. Their house was mortgage-free, but she knew her retirement income wasn't enough to cover some of her expenses, including medical emergencies. She got a reverse mortgage but didn't access the money until she had no other option.
"I rely on it only when I need it," she says. Recently, she hurt herself after falling and spent more than $10,000 during her at-home recovery.
"I had people come in for 3 hours in the morning and at night," she says. "It was expensive. I couldn't have afforded it without the reverse mortgage."
What about the kids?
As with many other seniors, Hiebert says she hesitated when she first heard of reverse mortgages because she wanted to leave her condo to her children.
"But they told me, 'We don't want you to think like that. We have money to take care of ourselves. We don't want you to worry,'" she says.
The name stays on the title
In addition to the guilty feeling, some seniors are confused about the process and worry that once they get a reverse mortgage they no longer own the house, Johnson says.
"After they get a reverse mortgage, they still have title," he says. "They can still do anything they want."
Once the homeowner dies, the heirs are given the option to pay off the loan and keep the house or sell it to pay off the loan. If the house sells for more than the amount owed, the heirs receive the remaining balance. If the loan balance is bigger than the home's value, the bank takes all the proceeds, but the balance of the loan does not have to be repaid.
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Costs of getting a reverse mortgage
One of the reasons reverse mortgages have gained a bad reputation is that many view them as too costly. But they are no different from conventional mortgages in terms of costs, says Peter Bell, president and CEO at the National Reverse Mortgage Lenders Association.
"It's still going to be accruing interest on the house the same way as a conventional mortgage," he says. "The question is whether you are going to be making those monthly payments now or let that be paid off later."
Borrowers also are required to pay for mortgage insurance when they get a reverse mortgage. As with the interest, the mortgage insurance costs are paid with equity. The insurance protects lenders (not borrowers) from losses.
It's essential to understand
Because the homeowner isn't making monthly payments to cover upfront costs, interest and mortgage insurance, the equity on the house can quickly shrink as the loan balance gets bigger over time.
It's crucial that seniors receive the required counseling before getting a reverse mortgage.
"For consumers, the most important thing they can do is to become educated on how it works," Johnson says. "A reverse mortgage is not the solution for everybody, but clearly it's an option for many people and the more information they know, the better they can understand how the product works and they can make an informed decision."