Are Reverse Mortgages a Scam?

By Heather Petty

For many people, the term “reverse mortgage” brings back memories of late-night commercials featuring Tom Selleck and Henry Winkler in the early- to mid-2000s. When the news covered reverse mortgages, the stories were almost always about how the programs took advantage of seniors, led them to default or left them owing a pile of fees.

And not all of that was false. Prior to the 2013 Reverse Mortgage Stabilization Act, the default rate on reverse mortgages was just shy of 10%. But some important changes, including funding restrictions, higher mortgage insurance premiums and tighter credit requirements, have changed the landscape of the reverse mortgage market, including government-backed options that can make it a safer choice to subsidize your retirement with your home’s equity.

How does a reverse mortgage work?

If you’re over 62 and own your home or are close to paying off your mortgage, you may be eligible for a reverse mortgage. It works similar to a regular mortgage with closing costs, interest rates and mortgage insurance — but instead of making payments, you receive payments from your home’s equity to help supplement your retirement.

Depending on the reverse mortgage program, you can get payments as a lump sum, a credit line, monthly payments over a set term or tenure payments for the rest of your life. The loan is repaid when you sell your home, either when you move or after you pass away. To avoid default, you must keep up with your property taxes and homeowners insurance.

Different types of reverse mortgages

There are three types of reverse mortgages, the most popular being the FHA-backed Home Equity Conversion Mortgage (HECM). This loan allows you to borrow a portion of your home’s equity, the amount of which depends on the age of the youngest borrower, the current interest rate and your home’s value. As of 2023, the FHA HECM caps out at $1,089,300, and the money can be used however you want. But you must go through reverse mortgage counseling and a financial assessment as part of the qualification process.

If your home’s equity is significantly larger than that, you’ll need a Proprietary HECM or jumbo reverse mortgage. Because this is a private loan, it comes with fewer restrictions and mortgage insurance isn’t typically required. But instead of monthly payments, you get all the money as a lump sum and are required to disburse the funds yourself.

If you’re a homeowner with low or moderate income, you may also qualify for a Single-Purpose Reverse Mortgage. The state government or a non-profit organization usually offer these small-amount loans to allow the homeowner to pay a home-related or other-specified expense, such as property taxes, repairs or renovations. The funding’s purpose is part of the qualification process, and the money can’t be used for anything outside the stated purpose.

Is a reverse mortgage the best option for you?

As with any home loan, reverse mortgages do come with some risks. But if you carefully compare lenders and their products, you may find the right program to help supplement your retirement income for as long as you live in your home.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.