What Is a Reverse Mortgage?

Thinking of getting a reverse mortgage? Bad idea. Reverse mortgages sound like a good idea—after all, who wouldn’t want a dream monthly retirement income paid for by their house! But here’s the truth: Reverse mortgages are major rip-offs. In fact, over 100,000 reverse mortgages have led to foreclosures and evictions.¹

Why are reverse mortgages so bad? Let’s take a look at what a reverse mortgage is at its core, and why it’s nothing more than a predatory program designed to take advantage of you.

What Is a Reverse Mortgage?

A reverse mortgage is a type of mortgage that’s only available to homeowners aged 62 or older who have already paid off a good chunk (or all) of their home’s original mortgage loan.

Similar to a traditional second mortgage, a reverse mortgage allows eligible homeowners to access their home equity—that’s the value of their home minus what they still owe—in the form of either a lump sum, line of credit or fixed monthly payment from the lender to the borrower.

Borrowers can only get a reverse mortgage on a single- or multi-family home (or condo) no bigger than a fourplex that serves as their primary residence. Additionally, borrowers must be free of any federal debts, like unpaid taxes.

How Does a Reverse Mortgage Work?

Getting a reverse mortgage works like a regular mortgage—you apply and then wait for the lender to approve you. Along with the qualifications we just went over, lenders will evaluate your finances to make sure you can afford to pay for other expenses you’ll still be on the hook for, like taxes and insurance.

Also similar to a traditional mortgage, homeowners who take out a reverse mortgage put up their house as collateral for the loan—that means, if you don’t live up to the terms of the loan, you lose your house.

Can we talk for a second about how risky that is? Why in the world would you want to risk losing your home—the most valuable thing you own—in your senior years? And talk about stress! Try getting a good night’s sleep when the future of your home is up in the air.

How Do You Pay Back a Reverse Mortgage?

Companies who offer reverse mortgages will really play up the fact that if you take one out, you won’t owe monthly payments. That is true, but remember: We’re still talking about a loan here. You may not make monthly payments, but you will pay the lender back eventually. After all, they’ve got to make money somehow.

Here’s how that works: As long as you continue paying your property taxes, homeowners insurance and other expenses related to your home, you won’t owe the mortgage company anything while you still live in your home. But when you stop living in your home, either because you move out or—yep—die, the balance on your reverse mortgage becomes due in full.

Yes, that means your family will be on the hook for paying your loan back if you die, unless they decide to let the bank have your home. Wow! Who wouldn’t want to be part of a program that preys on dead people and their grieving families? (We hope you picked up on our sarcasm there.)

Oh, and did we mention that interest on your reverse mortgage starts building from the moment you take it out and doesn’t stop until it’s paid back? Plus, reverse mortgages always come with a bunch of ridiculous fees.  

Are you getting the picture? These suckers flat-out stink!

Types of Reverse Mortgages

There are three main types of reverse mortgages you should know about.

1. Home Equity Conversion Mortgage (HECM)

The most common reverse mortgage is the Home Equity Conversion Mortgage (HECM). HECMs were created in 1988 to help older Americans make ends meet by letting them tap into the equity of their homes without having to move out.

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HECM loans don’t have any restrictions on how you use the money, which means you can use it to pay for bills, home renovations or a trip to Tahiti. Some folks even use an HECM to pay off the remaining amount on their regular mortgage—which is just nuts! And the consequences can be huge.

Also, HECM loans are kept on a tight leash by the Federal Housing Administration (FHA). For example, they won’t let you qualify if your home is worth more than a certain amount—that helps them make sure they get their money back in the end.²

And if you do qualify for an HECM, you’ll pay a hefty mortgage insurance premium that protects the lender (not you) against any losses.

2. Proprietary Reverse Mortgage

Proprietary reverse mortgages aren’t federally regulated like the HECM ones. Instead, they’re offered up by private companies.

And because they’re not regulated or insured by the government, they can draw homeowners in with promises of higher loan amounts—but with the catch of much higher interest rates than those federally insured reverse mortgages.

More cash might sound good, but what it really means is you’re even deeper in debt .

3. Single-Purpose Reverse Mortgage

A single-purpose reverse mortgage is offered by government agencies at the state and local level, and by nonprofit groups too.

Unlike HECMs, single-purpose reverse mortgages put rules and restrictions on how you can use the money from the loan. Typically, they can only be used to make property tax payments or pay for home repairs. (Sorry, you can’t use it on that trip to Tahiti.)

Because of that, the main purpose of these loans is to “help” keep borrowers in their home if they fall behind on costs like home insurance or property taxes, or if they need to make urgent home repairs. And since the money from a single-purpose reverse mortgage has to be used in a specific way, they’re usually much smaller than HECM loans or proprietary reverse mortgages.

Single-purpose reverse mortgages also aren’t federally insured, so lenders don’t have to charge mortgage insurance premiums.

Reverse Mortgage Pros and Cons

Before you go and sign the papers on a reverse mortgage (again, horrible idea), weigh the pros and cons: 

Pros

Reverse mortgages really only have two “pros.”

• You get some cash. Reverse mortgages give you access to some cash you can use to pay for living expenses or, in some cases, anything your heart desires.
• There are no monthly payments. You won’t owe the mortgage company a  dime until you move, sell your house, or die.

But let’s not act like that cash is falling out of the sky. It’s not a gift, it is a loan. Aka, debt. And you may not have to pay it back right away, but someone will eventually—and that someone could be one of your family members after you die.

Cons

There are plenty of these. Are you ready to roll your eyes?

• You could lose your home. This one’s the kicker. Lots of reverse mortgage lenders will try to sweet talk you into believing this isn’t possible. But what do you think will happen if you use up all the money from your reverse mortgage and start missing bills like your property taxes or homeowners insurance? Here’s a spoiler: You’ll lose your home. Plain and simple.
• You’ll pay lots of fees. Reverse mortgages are loaded with extra costs. Some of the biggest are the origination fee, mortgage insurance premium, closing costs and servicing fees. All those costs add up quickly—we’re talking close to $10,000.
• You could be getting roped into a scam. Reverse mortgages stink, but most lenders are legit. There are, however, some bad guys out there. The reverse mortgage industry has had problems with scams and fraud over the years and, if you’re not careful, you’ll wind up as the latest victim.
• The interest will add up quickly. Even though you don’t pay monthly payments on a reverse mortgage, your lender will start charging you interest from the moment you take it out. And they won’t stop until it’s all paid back. If you take out a $150,000 reverse mortgage at 5% interest on a $200,000 house, and you don’t pay it back for 25 years, you (or your family) will owe a whopping $113,000 in interest. No thanks!
• You’ll likely owe more than your home is worth. Advertisers promoting reverse mortgages love to spin the old line: “You will never owe more than your home is worth!” That is a complete lie. Let’s go back to the scenario we just looked at, where you owe $113,000 in interest on a $150,000 loan. Add those two numbers together, and the total amount you’d owe comes to $263,000—for a $200,000 home.
• You could leave your family a huge mess. We’ve talked several times about how it’s very possible to not owe your lender a dime on a reverse mortgage until you die. Well, if you do bite the dust before paying off your loan, your family will have two options: Pay back the entire amount you owe, or give up your home to the bank. Is that really the sort of situation you want to leave your family in when you die? Is that what you want your legacy to be? We’ll answer that for you: heck no!

Alternatives to Reverse Mortgages

Literally anything would be better than taking out a reverse mortgage. Okay, maybe not robbing a bank or committing tax fraud. But seriously, if you’re strapped for cash, there are better options than this horrible program.

First, remember there’s a great place to go when you need money: to work! If you’re in your 60s and struggling to make ends meet, keep working as long as you’re physically able to. Also, take full advantage of any retirement plans available to you and max them out—some plans, like the 401(k), let you contribute extra money in your 50s and beyond so you can catch up if you’re behind on retirement savings.

Having a good investment professional on your side is key to making the right retirement planning decisions, and you can find one in your area through our SmartVestor program.

Another good idea: Sell your house and downsize to something smaller you can pay cash for. That way, you can access the equity on your home without getting screwed by a reverse mortgage, and it could be a big boost to your financial situation. Think about it: If you own a home worth $350,000 and you have $250,000 in equity, you could sell your home, buy a smaller one for $225,000, and have $25,000 left over to put aside for emergencies or invest in retirement—and you’d have no house payment!

If you’re ready to downsize, you can start the process by connecting with one of our RamseyTrusted real estate agents in your area.

Some other helpful options are signing up for Medicare at age 65 to help with your medical expenses, and delaying your Social Security benefits until you turn 70 to maximize the amount you’ll get.

Talk to a Mortgage Expert You Can Trust

The facts (and the math) couldn’t be any clearer: No one should ever get a reverse mortgage. But even with other non-predatory mortgage options that aren’t designed to take advantage of borrowers, you shouldn’t sign the dotted line until you’re sure it’s the best decision for you.

That means talking to a mortgage expert, and you’ll find plenty of those with our friends at Churchill Mortgage. Their specialists will equip you with the information you need to make the right decision.

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