A Quick Lesson on Reverse Mortgages
A friend and neighbor called recently and asked what I thought of reverse mortgages. I’ve been involved in many aspects of real estate for decades and knew of these loans, but didn’t know much. So, I made some inquiries and got in touch with a reverse mortgage specialist who taught me a lot in a short time.
A couple decades ago, reverse mortgages generally had a bad reputation—and for good reason! Once a borrower got a reverse mortgage loan, any appreciation in the property value was shared 50-50 with the lender. In our market, that could mean hundreds of thousands of dollars of increased property value was handed to the bank on a silver platter. But those times—and federal regulations—have changed. Reverse mortgage products are much more “friendly” now and can be a valuable tool in many circumstances.
With a regular mortgage, monthly loan payments are applied to interest and to lower the principal balance on the loan. Therefore, the amount owed on the loan is reduced each month. With a reverse mortgage (also called “HECM” for Home Equity Conversion Mortgage), interest and principal is not paid and those payments not made are added to the principal balance of the loan. Essentially, the equity in the home is used as an asset, almost like a cash account.
Reverse mortgages have gotten safer and less expensive in recent years, but those with reverse mortgages would need to exercise discipline not to waste the money borrowed on frivolous purchases. That equity must be available when it’s needed, such as for health and long-term care expenses. Counseling before applying for a reverse mortgage is required, but talking to an independent, fee-only financial planner to make sure this approach makes sense is also a good idea.
As always, I’m here to help on real estate matters, but reverse mortgages are beyond the scope of what my license allows to advise on. If you or someone you know is considering a reverse mortgage, I’d welcome your call, but will need to refer you to one of the local experts I’ve worked with. I’m happy to help!
