A reverse mortgage is a financial product that allows homeowners, typically aged 60 or older, to convert part of their home equity into cash while retaining ownership of their property. This option can be particularly appealing to seniors who are “house rich” but “cash poor,” providing them with additional funds to support their financial needs. However, it’s essential to understand the intricacies of reverse mortgages to determine if they align with one’s financial goals and circumstances. ​ 

Understanding Reverse Mortgages

In a reverse mortgage, homeowners borrow against the equity they’ve built in their home. Equity is calculated as the difference between the appraised value of the home and any outstanding mortgage balance. As homeowners pay down their mortgage or as property values increase, their equity grows, providing a larger base for potential borrowing.  

One critical aspect of reverse mortgages is the compounding interest. Unlike traditional mortgages where borrowers make monthly payments to reduce the loan balance, reverse mortgages do not require monthly repayments. Instead, interest is added to the loan balance each month, leading to a rising-debt scenario. This means that over time, the amount owed increases as interest accumulates on both the principal and the previously accrued interest. ​ 

Importantly, reverse mortgages are “non-recourse” loans. This designation ensures that if the loan cannot be repaid—whether due to default or the loan balance exceeding the home’s value—the lender cannot claim the borrower’s other assets or those of their estate to satisfy the debt. ​ 

Types of Reverse Mortgages in New York

In New York, there are two primary types of reverse mortgage loans available to senior homeowners:​ 

1. Home Equity Conversion Mortgage (HECM): Often referred to as a HECM, this reverse mortgage is insured by the Federal Housing Administration (FHA). HECMs are the only reverse mortgages backed by the federal government, offering certain protections and standardized guidelines for borrowers. ​ 
2. Proprietary Reverse Mortgages: These are private loans that are not insured by the federal government. In New York, a specific type of proprietary reverse mortgage is the reverse cooperative apartment unit loan. This loan is secured by a borrower’s interest or shares in a cooperative housing entity, making it particularly relevant for residents of co-op apartments—a common housing structure in New York City. These loans are governed by New York State laws and regulations, notably New York Banking Law Section 6-O*2. ​ 

Eligibility Criteria

To qualify for a reverse mortgage in New York, applicants generally must:​

• Age Requirement: Be at least 60 years old. However, certain types of reverse mortgages may have higher age requirements. ​ 
• Homeownership: Own the home outright or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan.​ 
• Primary Residence: Occupy the property as their principal residence, living in the home for more than half of the year.​
• Property Type: Own a single-family home, a 1- to 4-unit building, or a federally-approved condominium or planned unit development.​ 

Additionally, if the home requires physical repairs to qualify for a reverse mortgage, the borrower must be able to finance these repairs, either through the loan proceeds or other means. ​ 

Loan Proceeds and Distribution Options

The amount a borrower can receive from a reverse mortgage depends on several factors, including the type of reverse mortgage, the borrower’s age, the home’s appraised value, and current interest rates. Generally, older borrowers with higher-value homes and lower interest rates can access more substantial loan amounts. 

Reverse mortgage proceeds can be disbursed in various ways, depending on the borrower’s preferences and the loan terms:​ 

• Lump Sum: A one-time cash payment at closing.​
• Monthly Payments: Regular disbursements over a specified period (term) or for as long as the borrower lives in the home (tenure).​ 
• Line of Credit: Funds that the borrower can draw upon as needed, offering flexibility and potentially accruing growth over time.​ 
• Combination: A mix of the above options, tailored to the borrower’s financial needs and goals.​ 

It’s essential to note that not every distribution option may be available to every borrower. Therefore, it’s crucial to discuss these options with the lender, a financial advisor, or a housing counselor to determine the most suitable arrangement. ​ 

Costs and Fees Associated with Reverse Mortgages

Obtaining a reverse mortgage involves various costs and fees, which can either be paid out-of-pocket or financed into the loan:​

• Application Fee: Charged at the time of application submission.​ 
• Appraisal Fee: Covers the cost of assessing the home’s market value.​
• Credit Report Fee: For evaluating the borrower’s credit history.​
• Loan Origination Fee: Compensation to the lender for processing the loan.​
• Closing Costs: Including attorney’s fees, title search, and recording fees.​ 
• Mortgage Insurance Premiums: Applicable for HECM loans, providing protections to both the borrower and the lender.​ 

Before closing on a proprietary reverse mortgage under New York’s Real Property Law Section 280 or 280-a, the only charges a lender may collect from a borrower are an application fee, an appraisal fee, and a credit report fee. For HECM loans, there

Repayment and Loan Maturity

One of the key features of a reverse mortgage is that repayment is not required until one of the following triggering events occurs:

• The borrower passes away.
• The borrower sells the home.
• The borrower permanently moves out of the home.
• The borrower fails to meet loan obligations, such as paying property taxes, homeowners insurance, or maintaining the home.

When a reverse mortgage becomes due, the home is typically sold to repay the loan balance. If the proceeds from the sale exceed the amount owed, the remaining funds go to the borrower (if living) or their heirs. If the home’s sale price is less than the loan balance, the FHA insurance (for HECM loans) covers the shortfall, ensuring that neither the borrower nor their estate is responsible for the difference.

Consumer Protections and Counseling Requirements

To ensure that borrowers fully understand the implications of a reverse mortgage, federal and state laws mandate certain protections:

• Mandatory Counseling: Before obtaining a reverse mortgage, prospective borrowers must complete a counseling session with a HUD-approved counselor. The session covers loan terms, financial implications, and alternative options.
• Cooling-Off Period: New York law provides borrowers with a three-day right of rescission, allowing them to cancel the loan without penalty.
• Restrictions on High-Pressure Sales Tactics: Lenders and brokers are prohibited from using aggressive sales tactics or requiring borrowers to purchase annuities or other financial products as a condition of obtaining the loan.

These safeguards help ensure that seniors are not pressured into taking on debt that may not be in their best interest.

Potential Risks and Downsides of Reverse Mortgages

While reverse mortgages can provide financial relief, they also come with risks and drawbacks that borrowers should carefully consider:

• Decreasing Home Equity: As interest accrues and loan balances grow, home equity declines, potentially leaving little to no inheritance for heirs.
• Loan Costs: Fees and interest rates can be higher than traditional home loans, reducing the amount of funds available.
• Obligations to Maintain the Home: Borrowers must continue paying property taxes, homeowners insurance, and home maintenance costs. Failure to do so can lead to foreclosure.
• Impact on Heirs: Heirs must repay the loan or sell the home to settle the balance, which could complicate estate planning.
• Medicaid and SSI Eligibility: The receipt of reverse mortgage funds could affect eligibility for need-based government assistance programs.

Alternatives to Reverse Mortgages

Before committing to a reverse mortgage, homeowners should explore alternative financial options, including:

• Home Equity Loans or HELOCs: These options may offer lower costs and allow homeowners to borrow against their home equity while maintaining ownership.
• Downsizing: Selling the home and purchasing a smaller, more affordable property could free up cash without the complications of a reverse mortgage.
• Government Assistance Programs: Seniors may qualify for state or federal assistance programs that provide financial aid for housing, healthcare, or living expenses.
• Renting a Portion of the Home: Taking in a tenant or roommate can provide additional income while allowing the homeowner to stay in place.

Conclusion

A reverse mortgage can be a valuable financial tool for seniors who need additional funds in retirement. However, it is a complex financial product with long-term implications that must be carefully considered. Understanding the costs, risks, and alternatives is essential to making an informed decision.

Prospective borrowers should consult financial advisors, HUD-approved counselors, and family members to ensure that a reverse mortgage aligns with their financial goals and circumstances. While it can provide short-term financial relief, it is not suitable for everyone. New York residents, in particular, must be aware of the state-specific regulations and protections that govern these loans to make the best decision for their financial future. For more information, visit the New York Department of Financial Services website.