Updated Reverse Mortgage Guide: Two Things You Should Know
By Nora Down Eisenhower, Consumer Financial Protection Bureau
WASHINGTON, Dec. 17, 2014 /PRNewswire-HISPANIC PR WIRE/ — Reverse mortgages are a special type of home equity loan sold to homeowners aged 62 years and older, which are repaid when the borrowers sell the home, move out, or die. It’s a complicated type of loan that works best for homeowners who carefully consider all of their options.
Things to consider
Before borrowing, seniors and their families should consider:
- The cost of homeowners’ insurance and taxes
- Plans for staying in the home or leaving it to family members
- Plans for dependents or others living in the home
- Alternatives to reverse mortgages
Because some important things about reverse mortgages have changed recently, the Consumer Financial Protection Bureau (CFPB) updated its guide to reverse mortgages (PDF).
First-year payout limits
One of these changes limits the amount of money you can draw from your loan in the first year. Borrowers often get into trouble by taking a lump-sum payment early on. It may feel great to get a big payment up front, but borrowers can outlive this money – which spells financial trouble for borrowers who live longer lives.
Borrowers can still take out lump-sum single payments – but this is still a risky choice. Borrowers should strongly consider the monthly payment or line of credit options before choosing to get a lump-sum. These options provide more long-term security than lump-sum payments.
Protections for non-borrowing spouses
Another important change is for couples considering a reverse mortgage. In the past, couples who took out a reverse mortgage loan in the name of only one spouse ran into trouble when the borrowing spouse passed away. When a borrower died, the “non-borrowing spouse” had to pay back the reverse mortgage or move out. With recent changes, a non-borrowing spouse may be able to continue to live in the home under certain conditions, even after the spouse who signed the loan dies. However, the non-borrowing spouse will still stop receiving money from the reverse mortgage after his or her spouse dies.
For couples considering a reverse mortgage, borrowing together makes more sense. If both spouses sign the reverse mortgage, then the surviving spouse can continue to receive monthly payments or use an existing line of credit. It also ensures that a surviving spouse may live in the home after his or her spouse (co-borrower) dies.
To make an informed decision, compare your options and read CFPB guide to reverse mortgages (PDF).