A Mortgage That Pays You

Your parents have spent years faithfully making monthly mortgage payments. Maybe it’s time to let that hard-earned equity give them cash in their bank account.

reverse mortgage

Photo by Yellow Dog Productions/Getty Images

Photo by Yellow Dog Productions/Getty Images

When Terry Savage’s 80-year-old father retired in 2002, he wanted to stay in his Florida condominium. But while the mortgage was almost paid off, he had plenty of other bills and very little in savings. So Savage, a nationally syndicated financial columnist, and her brothers helped him take out a reverse mortgage, allowing him to convert his home equity into tax-free cash to live on. “That gave him a sense of pride and independence,” says Savage. “He lived there happily for 16 more years. After he died, the loan came due, and my brothers and I turned the condo over to the bank and that was that. There are situations when a reverse mortgage is a blessing, and this was one.” 

Reverse mortgages can be a financial boost for seniors who need to supplement their income, whether for health care expenses, home improvements or the peace of mind of knowing there’s money for a rainy day. However, they’re not right for everyone. If your parents are considering a reverse mortgage, everyone needs to know the facts before signing on the dotted line. 

How It Works

With a traditional mortgage, the homeowner borrows money and makes monthly payments to a lender. With a reverse mortgage (RM), it’s the opposite: A lender makes payments to the homeowner based on the equity built up over the years—either with a monthly check, a lump sum or a line of credit—and the loan is secured by the home. Eventually, the loan (plus interest) will have to be repaid but, for the most part, that doesn’t happen until the borrower sells the home, vacates it for more than a year or dies, at which point the heirs can choose to repay the RM and keep the home, sell the home to pay off the RM, or turn the home over to the lender. 

To qualify, individuals need to be at least 62, and the house has to be their primary residence. The amount they can borrow depends on their age, the property’s value and the current interest rate. 

The Upside

An RM can help delay tapping into retirement savings—a plus if your parents would take a loss if they liquidated their investments. It can also allow them to defer Social Security benefits until they’re 70, when they’ll receive the maximum amount.

Most important, the amount due on an RM will never exceed the value of the property at the time the mortgage ends. As with a conventional mortgage, there’s still interest to pay. But if a borrower dies owing $250,000 on the loan plus $20,000 in interest and their home sells for only $225,000, the $45,000 loss is covered by mortgage insurance. The bank can’t sue the borrower’s estate for the money.

The Downside

Interest rates for RMs are more or less the same as for traditional mortgages, but remember that to qualify individuals have to pay off their existing mortgage as well as any other liens on their home. Subtract those costs from the loan amount, and borrowers may end up with less cash than they expected. 

In addition, they continue to be responsible for property taxes, insurance and any special assessments; fall behind, and the loan could come due early. Should your parents move—into a nursing home, say—the loan will be due after a year. Finally, with an RM the borrower’s heirs must repay the loan to keep the property.

Take the First Steps

To get an estimate of how much money your parents can borrow, use the calculator at the National Reverse Mortgage Lenders Association (NRMLA) website (reversemortgage.org), which also offers a state-by-state listing of companies that offer RMs and are bound by the group’s code of ethics.

To protect homeowners who are interested in taking out an FHA-insured RM, the law requires that they talk beforehand with an independent housing counselor. “They’re not financial planners; they’re housing counselors. The idea is to help the borrower figure out if a reverse mortgage will work
for them,” says NRMLA president and CEO Peter Bell. 

Families should do their research before committing to a reverse mortgage, but Savage says she can vouch for how valuable an option it can be for an aging parent. “My dad’s eyes really lit up when he realized he could afford to stay in this home he loved, sitting on the balcony looking at ocean.”