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How to tell if a reverse mortgage is right for you

After Eileen Redden inherited her idyllic childhood home last year, she knew she wanted to live out her days there. Enamored with the 1945 Cape Cod in Bayside, N.Y., she threw herself — and her savings — into renovating it.

But soon after Redden had spent considerable money on improvements, her business-coaching firm lost a top client, and she felt the financial pinch.


Your home can be like a savings bank in retirement.(Photo: iStockphoto)


With retirement looming, Redden, 63, needed another source of income. Today, she’s breathing easier with a reverse line of credit that allows her to pull money from her house as she needs it. Being able to stay in the home she loves while tapping its equity for a financial cushion was a win-win, Redden says.

“The key to deciding if a reverse mortgage is right for you is finding the right company to work with,” says Redden, who did extensive research before contacting American Advisors Group based in Orange, Calif., which specializes in reverse mortgages. “My loan officer took the time to listen to my financial goals, and there was no pressure or sales pitch.”

Redden is one of 58,000 people who took out a home equity conversion mortgage in 2015, according to the National Reverse Mortgage Lenders Association. An HECM is a federally insured reverse mortgage through the Federal Housing Administration. HECMs account for nearly all reverse mortgages in the U.S.

If you’re nearing retirement or already there, and you’re worried you won’t have enough money, a reverse mortgage might be a smart strategy.

How a reverse mortgage works

Reverse mortgages are the opposite of a traditional home loan in that they allow homeowners 62 and older to access their home’s equity without paying a monthly mortgage payment or taxes on the proceeds, says Chad Nicholson, a mortgage broker with American Financing in Aurora, Colo.

The FHA’s requirements to apply for a reverse mortgage include that you must be at least 62, that your home is your primary property and you live in it full time, and that you have no delinquent federal debts.


A reverse mortgage isn’t free money; you have to repay the loan when you sell the home or when you or your spouse no longer live in it, Nicholson notes. However, your surviving heirs won’t be on the hook to repay the loan. They’ll still receive any equity beyond the owed loan amount when they sell the home.

The amount of money you receive is based on a sliding scale of life expectancy; the older you are, the more you can pull out.

All of these reasons make a reverse mortgage a safer option than a home equity line of credit or a personal loan, both of which typically come with higher interest rates and stiff penalties if you miss a payment, Nicholson says.

“In retirement, it’s all about having cash flow flexibility and living a simpler way of life,” Nicholson says.

What it costs

One of the drawbacks of a reverse mortgage is the high financing costs. Borrowers can expect to pay up to 6% of their home’s appraised value in fees, including a mortgage insurance premium, third-party fees for closing costs, a loan origination fee and a loan servicing fee. Typically, you can roll most of these fees into your loan.

Also, there is a mandatory $125 financial counseling fee required by the FHA.

When should you use one?

For many Baby Boomers, Social Security checks are the only source of income in retirement, averaging just $1,230 a month, according to a study by the University of Wisconsin.

The research found that two-thirds of Baby Boomers who were employed in the private sector have no retirement income aside from Social Security, while having less than $25,000 in savings and investments. That breeds fear and uncertainty for many seniors, says Wade Pfau, professor of retirement income at the American College of Financial Services.

“Retirees are affected by a lot more risk, and they’re more vulnerable to market volatility,” Pfau says. “That’s where a reverse mortgage is a useful retirement income tool if you plan to stay in your home long enough to recoup the [loan] costs.”

If you’re a big spender, taking out a reverse mortgage could add to the problem. Don’t forget you’re reducing your home’s equity, which is important if you plan to leave the property behind as part of your estate. In other words: Be responsible with how and when you use the loan proceeds, or a reverse mortgage could cause more problems than it solves, Pfau says.

How to spot a reverse mortgage scam

Scammers use a lot of different tactics to trick homeowners into unscrupulous deals. Paul Fiore, executive vice president of retail lending at American Advisors Group, one of the largest reverse mortgage lenders in the country, offers a list of gut checks as you evaluate reverse mortgage offers:

1. Does the lender take time to understand your situation and educate you? If someone is trying to rush you into a decision without taking the time to explain things and offer education, that’s a red flag.

2. Does the lender allow you to choose your own reverse mortgage counselor, or does it try to select one for you? Every potential borrower must undergo independent reverse mortgage counseling with an FHA-approved HECM counselor before applying for the loan. The lender must provide a list of third-party resources that offer this counseling. If the lender doesn’t give you a list or pressures you to select a specific counselor, move on.

3. Is the lender asking you for money upfront? Lenders may talk to prospective clients and take preliminary information about their financial situation, but they cannot process an application or obligate the homeowner to specific costs without the homeowner undergoing independent counseling and showing proof of attendance.

4.  Are you feeling pressured to sign loan application documents before you’re ready? Ask a lot of questions and don’t sign anything until you feel confident and satisfied that you have all the answers you need to make an informed decision.

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Deborah Kearns is a staff writer at NerdWallet, a personal finance website. 

NerdWallet is a USA TODAY content partner providing general news, commentary and coverage from around the web. Its content is produced independently of USA TODAY.


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