Cash Poor & House Rich: Why Reverse Mortgages Make More Sense Than Ever in 2022

June 13, 2022

Reverse mortgages have been treated like unwelcome party guests for years…

But in 2022, horror stories of eviction and foreclosure have given way to a new reality: seeing them as a tool to ease financial burdens for seniors with a whole lot of house and not much money. 

The simplest way to think of it: you’re selling your house to the bank. 

So instead of paying a mortgage every month, the bank pays you until they own the house outright once again. It’s a tactic for older people with inadequate savings to get a source of income. Because with a reverse mortgage, the bank sends the homeowner/borrower money every month. And when the last person on the contract moves out or dies – the bank owns the home (at which point they can sell it and get their money back.

Insured by the Federal Housing Administration (FHA), Home Equity Conversion Mortgages (HECM) offer ample protection to borrowers such as:

  • Limits on borrowing, so people don’t borrow more than they can repay
  • Protection from default if the home value drops below a certain level
  • Guaranteeing that spouses remain in the home after the borrower’s death

For seniors who want to stay in their homes until death, a reverse mortgage is simply one option to consider. According to Wade Pfau, a professor at the American College, “It’s a way to free up money to pay for long-term care, and other unexpected living expenses.”

Yet most are still skeptical. Even in 2022. 

Because the complexity and misconceptions surrounding the product (e.g. it’s predatory or takes homes from seniors) abound. But when it’s broken down in a simple-to-follow, transparent way, the mysticism subsides. 

How a Reverse Mortgage/HECM in 2022 Works  

To qualify, one must be 62 years or older, own their home, live in it as a primary residence, and be able to pay and comprehend the fees and expenses that come with it (property taxes, insurance, HOA fees, etc.). 

To make sure that everyone involved is informed, borrowers are required to use an FHA-approved lender, and also attend an information session where everything is explained and spelled out (so there are no surprises or gimmicks). 

Loans are then received as a line of credit, monthly payments, or a combo of both. 

If the borrower opts in for a fixed-rate option, a lump sum payment will be made. But borrowers need to be careful. Because in the past, some seniors would take the lump sum, spend it right away, and not be able to pay the property taxes or insurance.

This is where evictions and defaults happened. And this is why the reverse mortgage product gained a bad reputation, at no fault of the lender or product itself. 

So to protect seniors, there are limits to how much can be borrowed and protections against evictions for homeowners if the value drops drastically (this is also why the FHA carefully screens borrowers to cut back on defaults). 

Lastly and contrary to popular belief, with ALL reverse mortgage products, the homeowner never hands over the title or ownership of their home until they die, move out, or don’t fulfill their end of the contract. Like many financial products, if borrowers play by the rules and seek out competent professional advice… there’s a tremendous upside. 

For seniors who want to stay in their homes while receiving a steady flow of income, a reverse mortgage could be just the thing they’re looking for.