Advertisements for reverse mortgages can be found on TV, in print, on-line, in fact anywhere there might be an older homeowner, there might also be a reverse mortgage ad. With all of this time and money being poured into advertising them, you might think that this is an excellent option for older homeowners in need of some ready cash. However, is a reverse mortgage a good idea or is it another financial product that needs to be carefully negotiated?
Is A Reverse Mortgage A Good Idea? While a reverse mortgage may enable elderly homeowners to stay in their own home and enjoy retirement, they also have many pitfalls. Personally, I do not think a reverse mortgage is a good idea. They are in fact just mortgages with huge fees and I would definitely not want a relative of mine to take one out.
Let me share with you why this is my stance on reverse mortgages
Is A Reverse Mortgage A Good Idea?
Tom Sellek, Henry Winkler, Robert Wagner, and Jerry Orbach are just some of the celebrities who have gazed into the camera and extolled the virtues of the reverse mortgage. With these and other aging celebrities singing their praises, surely a reverse mortgage must a safe and secure financial product?
Well, it all comes down to this. They are actors, paid to say appear on camera and say lines. They are not giving their personal opinion nor are they giving an informed financial professionals opinion. Celebrities are neither financial experts in general or an expert on your personal financial situation and you should blindly follow the advice written into a script and spoken by a celebrity no more than you should the same script spoken by someone unknown.
What Is A Reverse Mortgage?
A reverse mortgage is an amount of money paid from a lender to a borrower where the borrower uses their home as security. In this respect, a reverse mortgage is just like any other home loan. What makes a reverse mortgage different is that instead of the borrower making regular payments to pay off the loan as you do with a regular mortgage, the reverse mortgage requires no regular repayments. Instead, when the homeowner is no longer living in the property it is sold and the lender is repaid from the proceeds of the sale.
This makes a reverse mortgage an attractive proposition to some seniors, especially those with a limited income and many years of retirement stretching out before them.
Who Can Get A Reverse Mortgage?
Reverse mortgage loans are only available to people over the age of 62 who own their own homes and would like to borrow against the value in that home. The specific requirements, as detailed on the governments Home Equity Conversion Mortgage site are as follows:
- A borrower, or the youngest borrower if it a joint mortgage, must be 62 years of age or older.
- The home must be mortgage-free, or close to mortgage-free.
- You must occupy the residence against which you want to borrow, as your primary residence.
- You cannot be delinquent on any federal debts.
- All applicants must take part in a federally approved consumer counseling program to ensure they are fully aware of their obligations under the terms of the mortgage.
In addition, only certain types of homes are eligible. They are:
- Single-family homes, detached or otherwise.
- 1 to 4 unit properties where the homeowner lives in one of those four units.
- A manufactured home which meets the requirements of the FHA
- A HUD-approved condo.
What Are The Pros Of A Reverse Mortgage?
There’s no getting away from it, a reverse mortgage is an attractive proposition, especially if you are an elderly homeowner with a fixed income and growing outgoings. But does this mean that a reverse mortgage is a good idea?
There are of course some positives to a reverse mortgage:
- As long as you remain current with all home associated financial commitments, including property taxes, Homeowners Association Fees, insurance, etc you can continue to live in your home.
- A reverse mortgage loan is what is known as a non-recourse loan. This means that if, when the time comes to sell your home, neither you nor your heirs are personally liable for any outstanding amount of the mortgage if the proceeds from the sale do not completely cover the loan.
- The money paid out to you through a reverse mortgage is, generally speaking, tax-free.
- You can choose from a fixed-rate loan, which pays a single lump sum, or a variable rate mortgage which can pay out a regular income if you prefer.
- The proceeds from a reverse mortgage can be used to pay off any existing mortgage loan, eliminating your monthly mortgage payment.
What Are The Cons Of A Reverse Mortgage?
If you are wondering Is a reverse mortgage a good idea? Then you really need to be familiar with the downsides.
- There are considerable fees associated with a reverse mortgage, basically making it an extremely expensive proposition. You will be charged mortgage insurance premiums of up to 2.5% and interest which will actually be rolled into the loan so you do not have to pay them. However, service fees will be calculated on the amount of the loan and your life expectancy and then deducted from the money you are paid.
- The loan balance actually increases over time as you never pay any of the mortgage and interest is added every month for the term of the loan.
- The loan becomes due one year after the borrower dies or moves out of the home. Anyone else living in the property will have to leave unless they are a spouse or other person specifically listed on the loan paperwork.
- If you want to leave your home to your heirs a reverse mortgage can make things considerably more complicated for them after you have passed. The reverse mortgage company may push for a speedy sale meaning your home is sold quickly to strangers rather than waiting to see if heirs can raise funding and keep the home in the family.
- If you have to leave your home and move into a nursing home you will need the equity in your home to pay the fees. Once you have paid back the reverse mortgage you may have very little, if anything left over for these fees meaning you will have to enter a Medicaid facility.
- If you rely on Medicaid a monthly payment from your reverse mortgage, or the sudden lump sum can render you no longer eligible.
Can I Lose My Home With A Reverse Mortgage?
Yes, you can lose your home after taking out a reverse mortgage. While there are only a few situations where this can happen it is still something to which you should give consideration. You can lose your home with a reverse mortgage if:
- The home is no longer your primary residence.
- You move out of your home, for nonmedical reasons, for more than six consecutive months.
- You move out of your home, for medical reasons, for more than twelve consecutive months.
- The home is sold for any reason.
- Your property is not maintained according to the requirements of the FHA. This means that if you become unable to keep up with maintenance you will have to pay someone to do it for you or potentially lose your home.
- You stop paying your property taxes, homeowners insurance, Homeowners Association fees or any other payment attached to the property.
- If you die and your spouse or partner is not listed on the mortgage documents as a non-borrowing resident, they will be given the opportunity to buy the home and if they are unable to do so they may be evicted.
The Last Word
Generally speaking, if I am asked if a reverse mortgage is a good idea, I answer that no, it is not. While it may seem like an attractive proposition while you are fit and healthy, or you find yourself in a temporary financial bind, the longer you hold a reverse mortgage the more likely it is that something will go wrong.
You may discover your lifetime of hard work and financial stability is wiped out and you have nothing left to leave to your heirs. Your beloved family home can end up being sold to strangers, you could be forced to move out and sell up if you become unable to maintain your home to FHA standards and the balance of the loan will only grow every month.
If you are looking for a way to access the equity in your home there are other less expensive and less risk-laden alternatives to explore. For example, if you need short-term access to money n a hurry you could apply for a home equity line of credit. This will never require you to sell the home you love in the future as a result of a short-term need today.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.