Television commercials for reverse mortgages commonly extol the benefits of a guaranteed tax-free income for homeowners aged 62 and older. However, reverse mortgages can be expensive and, in some cases, put a person's home at risk. You may also become ineligible for certain government benefits, put your family members at risk for eviction, and leave your heirs with more hassles after you die.

What Is a Reverse Mortgage?

A reverse mortgage allows a homeowner with sufficient equity in their home to draw on that equity for income. Unlike a 澳洲幸运5官方开奖结果体彩网:home equity loan or line of credit, which the homeowner has to pay back on a regular schedule, the income from a reverse mortgage need not be paid back until the homeowner leaves the home, sells it, or dies. At that time, the loan balance, interest, and accrued fees must be paid in full, usually with the proceeds from selling the ho✱me.

For home🔯owners with few or no other assets, a reverse mortgage can provide a much-needed income supplement in retirement. It can also help pay for medical bills or other unexpected expenses. Howev🍎er, it has some potential drawbacks worth noting before you apply.

How Reverse Mortgages Work

The most common type of reverse mortgage is a home equity conversion mortgage (HECM), which is issued through private lenders but insured by the 澳洲幸运5🦂官方开奖结果体彩网:Federal Ho𝔉using Administration (FHA). These mortgages are ✱available only to borrowers over the age of 62.

Lenders can also issue their 澳洲幸运5官方开奖结果体彩网:proprietary reverse mortgages, often with higher loan limits than HECMs and sometimes without the same age restrictions. In addition, some states and municipalities offer 澳洲幸运5官方开奖结果体彩网:single-purpose reverse mortgages, designated for a specific use, such as home repairs or tax payments.

The amount that a person can borrow depends on different factors, including their age (and that of any co-borrowers), their loan's interest rate, and the appraised value of their home.

Reverse mortgages can be structured in several ways. The borrower can receive the money as a single lump sum, as a credit line that they can draw on as needed, or in regular monthly payments for a set period or for as long as they live in the home.

While reverse mortgages can be useful in some instances, they also have downsides that anyone who's considering one needs to be aware of.

Relatively High Fees

Lenders can offer slightly different products under the reverse mortgage banner. But they all charge an assortment of fees, and a reverse mortgage will typically be more expensive than a regular mortgage.

Before taking out a HECM, borrowers must receive counseling from a reverse mortgage housing counseling agency approved by the U.S. Department of Housing and Urban Development (HUD). Typically that will be free or involve a modest fee. The counselor should explain all of the likely costs and how they work.

The following fees apply to HECM🐬s, but other kinds of reverse ♕mortgages will have similar lists of their own.

• Origination fee: With a HECM, the lender can charge either $2,500 or 2% of the first $200,000 of your home's value, whichever is greater, plus 1% of the amount over $200,000. The fee can't exceed $6,000.
• Real estate closing fees: As with a regular mortgage, reverse mortgages can rack up different closing costs, including a home appraisal and inspection, title search, recording fees, mortgage taxes, and a credit check of the applicant, among others.
• An initial mortgage insurance premium: This is typically equal to 2% of the home's value.

Borrowers can pay these upfront costs with their own money or use the loan proceeds to pay for them. I🃏n addition, borrowers can expect ongoing expenses, including:

• Interest: The interest on a reverse mortgage accumulates, adding to the amount the borrower or their heirs will have to pay back at the end. Unless the borrower takes the money in a lump sum, the interest rate will be variable, which means it can rise or fall.
• Servicing fees: These monthly fees reimburse the lender for its ongoing costs, such as making payments and processing paperwork. The HECM rules limit these fees to no more than $30 for fixed-rate loans or variable-rate loans that adjust just once a year and no more than $35 for variable loans that adjust monthly.
• Annual mortgage insurance premium: This will be 0.5% of the outstanding loan balance every year. As such, it will rise over time as the borrower draws out more equity.

Again, these numbers apply to HECMs and may be higher or lower with o🎀ther types of reverse mortgages. Either way, borrowers will be in for a lot of fees, which has been a traditional complaint with these types of loans.

Ineligibility for Certain Government Benefits

In some instances, a reverse mortgage can affect a homeowner's eligibility for government benefits.

If the homeowner wants to receive Medicaid, the joint federal and state health insurance program for some low-income and elderly Americans, their eligibility is based on their income and assets. Income from a reverse mortgage won't count against them, but if they receive a lump sum from the reverse mortgage, that will be included among their assets. If their total assets exceed the limit for their state, they will have to spend the money to be eligible.

Money from a reverse mortgage lump sum can affect a person's eligibility for 澳洲幸运5官方开奖结果体彩网:Supplemental Security Income (SSI), a federal program for low-income individuals. The SSI program also sets limits on assets (which it refers to as resources), currently $2,000 for individuals and $3,000 for couples.

Lenders May Foreclose

Whe🧸n homeowners take out a reverse mortgage, they agree to keep the property in good repair and to continue to pay real estate taxes, homeowners insurance premiums, and any association or related fees out of their pockets.

Failure to do so can allow the lender or loan servicer to foreclose on the property and cost the borrower their home, according to the 澳洲幸运5官方开奖结果体彩网:Consumer Financial Prote🃏cti🐬on Bureau (CFPB).

Other Family Members Can Be Evicted

Once the borrower(s) on a reverse mortgage die or leave the home for a certain length of time, the reverse mortgage can become due and payable. In the past, this sometimes meant that a spouse who wasn't listed as a borrower in the loan agreement (often because they hadn't reached age 62 when their spouse took out the loan) could be evicted.

Major reforms enacted in 2014 and 2021 for HECMs issued after those dates expanded the protections for some spouses. In particular, those who qualify as eligible non-borrowing spouse🍌s can now remain in the home for the rest of their lives.

• Under the 2014 rules, eligible non-borrowing spouses must have been legally married to the borrower when the reverse mortgage closed and remained married to them until the borrower's death. For couples prohibited by law from marrying before the closing because of their gender, the survivor was eligible if the couple legally married before the death of the borrower and remained married until that person's death. The non-borrowing spouse must also have lived in the property at the time of the closing and continued to live there as their principal residence.
• The 2021 rules broadened eligibility so if the borrower didn't die but moved into a nursing home or similar facility, their spouse could remain in the home. Before then, the spouse would have had to pay off the mortgage after one year.

Spouses who don't meet these requirements must still pay off the loan if they wish to remain in the home. This is also true for other heirs, such as children, who may live there. Otherwise, they will need to sell it.

The good news is that if they can sell it for more money than is needed to pay off the loan, they get to keep the difference. And even if the loan balance exceeds the sale price, they won't have to make up the difference as long as they sell it for at least 95% of its 澳洲幸运5官方开奖结果体彩网:appraised value. According to the CFPB, the lender uses the proceeds from the sale of the home as payment on the loan while the "rest of the loan is covered by the mortgage insurance that the reverse mortgage borrower paid during the duration of the loan."

As an al﷽ternative, they can simply turn it over to the lender and walk away.

Smaller Inheritances 𒅌and Greater Hassles for Any Heirs

A reverse mortgage can also deplete much of the homeowner's wealth, especially if their home is basically all they have, leaving little behind for their heirs.

That said, it is their home to do with as they decide, and ℱit may be better for them to take out a reverse mortgage than to rely on their family for financial assistance. And it is certainly better than having to live out their last years in poverty.

Leaving a home with a reverse mortgage to heirs (other than an eligible spouse) also puts a burden on them. In general, they'll have 30 days after receiving a due and payable notice from the lender to pay off the debt, either by selling the home, buying it themselves, or signing it over to the lender. However, some lenders will extend that period by up to six months. This can be helpful if an heir wants to keep the home but needs to obtain financing to do so.

The Bottom Line

A reverse mortgage can allow an older homeowner to tap the equity that has built up in their home over the years without having to sell it or move out. However, these loans can be expensive and also have some disadvantages for the borrower's heirs, so it's worth considering the alternatives.