You have seen the ads on television. The celebrity spokesperson claims that you can solve all of your problems with a reverse mortgage. It sounds too good to be true. And you know that when something sounds too good to be true, it usually is. Therefore, are reverse mortgages good or evil?
How does a reverse mortgage work?
A reverse mortgage is a loan. You get cash in a lump sum or in monthly payments, and you get to keep living in your home. The loan is due when you pass away. If the loan is not paid by your estate, the bank will do a foreclosure to sell the house and pay back the loan. If the sales proceeds are less than the outstanding loan balance, no worries – as long as your loan required you to buy FHA insurance. The insurance will cover the difference. If the sales proceeds are more than the outstanding loan balance, your heirs get the difference.
Experts disagree on whether reverse mortgages are a good idea. While many financial gurus despise reverse mortgages, others suggest that while reverse mortgages may work for some people, they are a bad idea for most people.
Reasons to consider a reverse mortgage
In some circumstances, a reverse mortgage may be a smart financial move. Just make sure that you get quotes from at least three lenders and complete reverse mortgage counseling. You might want to think about a reverse mortgage if:
- You do not intend to gift your home to anyone when you pass away.
- You have the money to keep paying your real estate taxes and homeowners insurance, and to keep your house well-maintained.
- The reverse mortgage will give you enough money to solve your current financial issues for the long-term.
- You plan to continue living in your home for a long time. Reverse mortgages have costly up-front fees. Therefore, these loans are not a good idea, if you are planning to move in the next few years.
- Your spouse is at least 62 years old - so that she can be a borrower on the reverse mortgage. Being on the loan, protects her from losing the home when you move into assisted living or pass on. This status also keeps the monthly income from the loan coming to your spouse after you no longer live in the home.
Reasons not to get a reverse mortgage
On the other hand, for some people a reverse mortgage cause problems. Here are some reasons not to get a reverse mortgage:
- Your children will not inherit your home.
- You cannot move, either to a different house or to assisted living. Since you must live in the home to be eligible for a reverse mortgage, moving out triggers the loan repayment requirement.
- You must be healthy enough to continue living in your home indefinitely. If you move to an assisted living facility, you will have to repay the loan.
- You have to keep paying real estate taxes and homeowners insurance, or the lender will call in the loan. If you do not keep your home in good repair, the lender can sell your home to pay off the loan.
- Anyone who lives with you will have to move out, if you no longer live in the home. Whether you move to assisted living or you pass away, your spouse, disabled child, relative or friend will not be allowed to stay, unless he is a borrower on the reverse mortgage.
- The interest rates are variable on many reverse mortgages, which adds uncertainty to your financial well-being.
The laws on reverse mortgages vary by state, so make sure you talk with an elder law attorney in your area.
CNBC. “Rethinking reverse mortgages: Bad move or bright idea?” (accessed July 11, 2017) https://www.cnbc.com/2015/04/01/rethinking-reverse-mortgages-bad-move-or-bright-idea.html
- S. News & World Report. “6 Drawbacks of Reverse Mortgages.” (accessed July 11, 2017) https://money.usnews.com/money/personal-finance/banking-credit/articles/2017-06-16/6-drawbacks-of-reverse-mortgages
Investopedia. “5 Signs a Reverse Mortgage is a Good Idea.” (accessed July 11, 2017) https://www.investopedia.com/articles/personal-finance/090115/5-signs-reverse-mortgage-good-idea.asp
Investopedia. “5 Signs a Reverse Mortgage is a Bad Idea.” (accessed July 11, 2017) https://www.investopedia.com/articles/personal-finance/090115/5-signs-reverse-mortgage-bad-idea.asp