Let’s Get Real About Reverse Mortgages

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I’m not entirely sure how Mr. Magnum P.I. himself, Tom Selleck, became the face of the reverse mortgage industry, but he’s been featured in ads for the financial instruments that run nearly on repeat on late-night TV for years now.

But there’s more to reverse mortgages than that fun fact.

(Here’s another one before we move on: Singer Pat Boone was the spokesman for reverse mortgages long before Selleck took over.)

What is a reverse mortgage?

This is one of those rare cases when the words used to describe something pretty much nail it. When you take out a reverse mortgage, your lender pays you a set sum every month that’s borrowed against the value of your home (or condo or other primary residence). You don’t have to pay it back until you move, sell the house or die.

It’s a way to extract value from your house while you’re still living in it to pay medical bills or other things. That’s why they’re so popular with older people who have a lot of equity saved up in their homes but aren’t yet ready to move out. They get the money now and can move when the time is right.

There are 3 types to consider:

Home Equity Conversion Mortgage (HECM): With an HECM, your house doesn’t lose value after you take out the reverse mortgage. Therefore, you won’t be responsible for paying the difference if you sell the home or default on the loan. HECMs are available only through lenders approved to disburse FHA loans,

Proprietary Reverse Mortgage: Offered by private lenders, this type of loan is for homes exceeding the value limits set by HUD. It’s like a jumbo mortgage in reverse. They aren’t insured by the federal government but they do usually come with a higher interest rate than a HECM.

Single-Purpose Reverse Mortgage: These are offered by local and state government agencies and nonprofits and are tied to a specific purpose, such as paying off property taxes or making home improvements. They often have lower fees and interest rates and looser eligibility requirements for lower income borrowers.

What’s right for you? You’re not going to want to hear this, but it depends. There is no perfect answer when it comes to financial products like reverse mortgages. For some people they are the ideal solution for funding retirement, while for others they can introduce new complexity to what should be a relaxing time. 

Whatever you choose, research the rules and guidelines of the reverse mortage you’re considering closely and make sure you fully understand what you’re getting into before you sign on the dotted line. You’re effectively leveraging your house, and there’s no going back if you make a bad decision

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