Q&A: The new reverse mortgage is safer but still expensive

Dear Liz: If you have never written about the new reverse mortgages, please consider it. I’m nearly 90 and this Home Equity Conversion Mortgage sounds too good to be true. Is it? I’ve talked to a broker and a direct lender and attended a two-hour seminar on the subject.

Answer: Reverse mortgages once deserved their bad reputation, but changes to the Federal Housing Administration’s HECM program in recent years have made them safer and less expensive. They’re still not a cheap way to borrow, though, because of significant upfront costs. Using a home equity loan or line of credit is often a better option if you can make the payments.

A reverse mortgage may be an option if you can’t make payments. These loans allow you to tap the equity in your home if you’re 62 or older. The amount you borrow plus interest compounds over time and is paid off when you die, sell or permanently move out. You can get the money as a lump sum, in a series of monthly checks or as a line of credit you can tap.

The older you get, the more you can receive from your home — but you can’t get the money all at once, as you could in the past. If you choose the lump sum option, you can only access 60% of your loan amount the first year. This restriction was put in place to keep you from blowing through your equity too fast.

While reverse mortgages have improved, some of the people touting them have not. Investment salespeople and scam artists sometimes try to push older people into reverse mortgages as a way to come up with cash to invest in their schemes.

You’re required to get counseling from someone approved by the U.S. Department of Housing and Urban Development to discuss how reverse mortgages work and how much one may cost you. In addition, consider hiring a fee-only financial planner to give you advice.

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