Are Reverse Mortgages a Good Idea for Retirees?

side of green house constructed ...
By Kelly Campbell

Interest has increased in recent years about whether reverse mortgages are a practical way to supplement retirement income. In a reverse mortgage, a lender makes payments to you based on a percentage of your home's appraised value.

Three Types
  • Proprietary/private: Where a private company creates and backs the loan.
  • Single-purpose: Where the loan proceeds can only be used for a specific purpose, stated by the lender. For example, money from a single purpose reverse mortgage could only be used to cover property expenses, including repairs, energy efficient improvements, taxes and insurance. Single purpose loans are not available everywhere, and are usually offered through local government agencies or nonprofit organizations. This also makes them the least expensive option.
  • The Home Equity Conversion Mortgage: This is the most popular type of reverse mortgage and is backed by the Federal Housing Authority and is federally insured.
HECMs allow a homeowner or homeowners, aged 62 and older, who either own their home outright or have a small existing mortgage, to borrow money against the equity of their home. Only single-family houses, occupied by the borrower or two to four unit homes, with at least one unit occupied by the borrower, are eligible. During the application process, you're required to meet with a government-approved housing counselor who will determine if you're financially capable of paying the costs associated with the loan.

Because you're taking out a loan against your home's value, you're still the property owner until the loan is due. This means you'll continue to pay property taxes, homeowners' insurance and maintenance costs. The balance of the loan becomes due when the borrower moves out of the house, or passes away. The house is then liquidated, and the proceeds are used to pay off the balance of the loan.

There are limits to how much a person can borrow using a HECM. A person can only take up to the FHA HECM mortgage limit of $625,500. If the home's value is under that cap, then the borrower is able to access a percentage of home's appraised value. However, owners with a highly valued home and little or no mortgage, may qualify for larger loan advances through a propriety-reverse mortgage, though the cost will likely be higher.

Lots of Rules

A reverse mortgage is typically structured so that the total loan amount, including interest and fees, will not exceed the value of the home over the life of the loan. However, if the proceeds from your home's sale exceed the balance of the loan, then you, your spouse or your heirs will receive the difference. Should the sale not cover the loan balance, then, in most cases, the lender's insurance will cover the difference.

%VIRTUAL-article-sponsoredlinks%The fact that reverse mortgages allow people to stay in their own homes is one of its major benefits, but if you're considering relocating or renting, then this isn't your best option. If you become sick and have to move into an assisted living facility for 12 consecutive months, then your home is no longer considered a primary residence, and the bank has the ability to take control over the house. This can become a major problem if only one borrower is listed on the mortgage.

The amount of money you can expect to receive from a reverse mortgage depends on several factors. The major components are your age, value of the home and the length of the loan. If there are two people listed on the mortgage, then the age of the youngest borrower is used. The current interest rate, initial mortgage insurance premium, closing costs and repair costs can also play a role in determining the monthly amount that you can expect to receive.

Current interest rates are important to consider, because they play two very important roles in the reverse mortgage process. First, they help determine a borrower's loan advance amounts. Second, they determine the interest charged on the outstanding balance. It's important to understand that the interest accrues over time, increasing the loan amount. This means that interest payments can take up a decent portion of your reverse mortgage payments, leaving you with less money than expected.

Payment Structures
  • Tenure payments: You'll receive equal monthly payments, as long as at least one borrower is living and continues to occupy the property as the principal resident.
  • Term payments: equal monthly payments for a fixed period of selected months.
  • Line of credit: unscheduled payments, in varying amounts, based upon your needs, until the loan is exhausted.
  • Single disbursement lump sum: a single payment when the loan is closed. However, recent rule changes could see payouts reduced by 10 percent to 18 percent, depending on underwriting factors.
Insurance Premiums and Fees

All FHA-backed loans require lenders to collect mortgage insurance premiums. If you withdraw less than 60 percent of the available loan amount, during the first year, the mortgage insurance premium is 0.5 percent of the maximum claim amount. If you take over 60 percent, the mortgage insurance premium increases to 2.5 percent. Borrowers will also pay a 1.25 percent annual premium that based on the maximum claim amount.

Outside of the insurance costs, reverse mortgages also tend to have high fees, including above-average origination costs, closing costs and numerous service fees. The maximum allowed origination fee on federally insured loans is 2 percent of the initial $200,000 of a home's value and 1 percent of the remaining value, with a cap of $6,000.

Closing Thoughts

A reverse mortgage isn't right for everyone. You should consult a financial professional who is familiar with your situation before you would take this option. Although being able to access the equity in your house without having to make monthly payments is attractive, the costs and fees associated with a reverse mortgage are negatives that must be considered. People should remember they might not be able to bequeath their house to heirs, which could also be a significant deterrent.

Seniors with a high credit score should carefully consider and analyze their options, including traditional mortgages and home equity loans. If you can comfortably make the monthly payments, then a home equity loan might be a way to accomplish the same goal, while also avoiding the fees associated with a reverse mortgage.

More from U.S. News

10 Easy Ways to Pay Off Debt
See Gallery
Are Reverse Mortgages a Good Idea for Retirees?
"Your daily habits and routines are the reason you got into this mess," writes Trent Hamm, founder of "Spend some time thinking about how you spend money each day, each week and each month." Do you really need your daily latte? Can you bring your lunch to work instead of buying it four times a week? Ask yourself: What can I change without sacrificing my lifestyle too much? 
Remove all credit cards from your wallet and leave them at home when you go shopping, advises WiseBread contributor Sabah Karimi. “Even if you earn cash back or other rewards with credit card purchases, stop spending with your credit cards until you have your finances under control,” she writes.
If you do a lot of online shopping at one retailer, you may have stored your credit card information on the site to make the checkout process easier. But that also makes it easier to charge items you don't need. So clear that information. "If you’re paying for a recurring service, use a debit card issued from a major credit card service linked to your checking account," Hamm writes.  
Reward yourself when you reach debt payoff goals. "The only way to completely pay off your credit card debt is to keep at it, and to do that, you must keep yourself motivated," Bakke writes. Just make sure to reward yourself within reason. For example, instead of a weeklong vacation, plan a weekend camping trip. "If you aim to reduce your credit card debt from $10,000 to $5,000 in two months," Bakke writes, "give yourself more than a pat on the back." 
“Establish a budget,” writes Money Crashers contributor David Bakke. “If you don't scale back your spending, you'll dig yourself into a deeper hole." You can use personal finance tools like, or make your own Excel spreadsheet that includes your monthly income and expenses. Then scrutinize those budget categories to see where you can cut costs.    
Sort your credit card interest rates from highest to lowest, then tackle the card with the highest rate first. "By paying off the balance with the highest interest first, you increase your payment on the credit card with the highest annual percentage rate while continuing to make the minimum payment on the rest of your credit cards," writes spokeswoman Hitha Prabhakar.
To make a dent in your debt, you need to pay more than the minimum balance on your credit card statements each month. "Paying the minimum -– usually 2 to 3 percent of the outstanding balance -– only prolongs a debt payoff strategy," Prabhakar writes. "Strengthen your commitment to pay everything off by making weekly, instead of monthly, payments." Or if your minimum payment is $100, try doubling it and paying off $200 or more. 
If you have a high-interest card with a balance that you’re confident you can pay off in a few months, Hamm recommends moving the debt to a card that offers a zero-interest balance transfer. "You’ll need to pay off the debt before the balance transfer expires, or else you’re often hit with a much higher interest rate," he warns. "If you do it carefully, you can save hundreds on interest this way."
Have any birthday gifts or old wedding presents collecting dust in your closet? Look for items you can sell on eBay or Craigslist. "Do some research to make sure you list these items at a fair and reasonable price," Karimi writes. “Take quality photos, and write an attention-grabbing headline and description to sell the item as quickly as possible." Any profits from sales should go toward your debt. 
If you receive a job bonus around the holidays or during the year, allocate that money toward your debt payoff plan. "Avoid the temptation to spend that bonus on a vacation or other luxury purchase," Karimi writes. It’s more important to fix your financial situation than own the latest designer bag.
Read Full Story