Reverse mortgages represent an alluring proposition for seniors: Stay in your home while the bank pays you to help supplement your retirement income.
For some, that’s peace of mind. Others scoff at the hefty fees and restrictions. And in many cases, alternatives like using one’s home as collateral for a loan from a family member might be better.
Generally, a reverse mortgage lets homeowners 62 or older borrow against home equity. They can opt for a lump sum, a line of credit, or regular payments and don’t have to pay a monthly mortgage. The homeowner retains title and must pay for insurance and property taxes.
The loan and fees are due once all parties listed on the deed die, or the home is vacated for 12 straight months. The home is usually sold, and the proceeds pay off the loan, interest, and fees.
The interest on the loan balance is typically calculated monthly and accrues over time. So, if you elect to receive regular payouts, for example, the amount you owe, plus interest, grows. When the loan is repaid, the lender also collects all the compounded interest. Here are some tips on whether to get a reverse mortgage:
■ Homeowners as young as 62 can qualify, but the longer you wait the more you can borrow. You also stand to save more money on interest.
And the sooner you start depleting your home equity, the greater the chance you may not have enough money when you’re older, says Noreen Perrotta, finance editor at Consumer Reports.
‘‘Life expectancy being what it is, if you’re tapping your home equity at 62, you have to wonder what’s going to be left at 82,’’ she says.
■ Reverse mortgages fall into three categories: Home Equity Conversion Mortgages, backed by the government; proprietary, which are essentially private loans; and single-purpose, which restrict how you can spend the money.
By far, the more commonly available reverse mortgage is the HECM. Lenders approved by the Federal Housing Administration offer HECMs, which make the loans widely available. Borrowers don’t have to meet any income, credit or medical criteria and use the funds as they please.
■ Reverse mortgages involve a slew of fees, such as costs for closing and servicing the loan, origination fees, and a premium for mortgage insurance (on federally backed loans).
Like regular home loans, reverse mortgages can come with a fixed interest rate or one that’s adjustable, meaning it can rise or fall over time.
■ If a borrower has to be moved to an assisted living facility for more than 12 months, the reverse mortgage will come due. Such mortgages require borrowers to live in the home.
■ Homeowners should investigate alternatives, particularly if they may draw funds soon after they meet the minimum age requirement. ‘‘If you have to tap it at that early age, you might be better off selling the home,’’ Perrotta says.