A reverse mortgage can be a very viable solution for the right homeowner—one who is primarily seeking a way to effectively age in place.
Available to people who are age 62 or older and have built up a substantial amount of equity in their homes, reverse mortgages allow borrowers to wipe out their mortgage payments and can also serve as a means to generate additional cash flow in retirement.
But reverse mortgages are not right for everyone, there’s a downside to reverse mortgage loans. Here are some telltale signs that another financial solution may be a better option for you and your situation.
4 times a Reverse Mortgages makes for a bad idea:
1. You intend to move closer to family a few years down the road.
If you have any desire to move in the near term, whether it be closer to family or to a residence that is better equipped for aging, taking out a reverse mortgage today may not be the best idea. The loan becomes due and payable as soon as the borrower moves from the home or passes away, so if you have plans to move in the next few years, you may want to also wait on getting the reverse mortgage.
There is a type of reverse mortgage available, the Reverse Mortgage for home purchase, that allows a borrower to take out a reverse mortgage and purchase a new home within a single transaction. This may be a solution when the time comes to move, and it’s a way to avoid paying two sets of closing costs both for the purchase and the new reverse mortgage.
2. You aren’t physically able to maintain your home.
One requirement of a government-insured reverse mortgage is property maintenance. Like with any Federal Housing Administration-insured mortgage, a reverse mortgage specifies the home must be maintained to FHA’s standards. If you have mobility challenges and are unable to maintain your home, it may be worth considering whether there is a better option.
However, it’s also important to note that reverse mortgage proceeds can be used however the borrower so chooses, including property maintenance.
3. Your spouse lives with you, but does not qualify for a reverse mortgage
HUD Changed their rules in 2014 so that if your spouse is not 62 at the time you obtain a reverse mortgage, you can still get the loan in the name of the older spouse only.
The younger spouse is no longer forced to leave the home at the time of passing of the older spouse provided that the younger spouse was a non-borrowing spouse when the loan was originally taken out (would not be the case with a spouse who married after the loan was already in place) and that the spouse still resided in the home and the title passed to the remaining spouse.
Because they are no longer forced to leave, the age of the younger spouse will now be taken into consideration though to determine the benefit and borrowers with younger spouses will receive less money.
The thing that homeowners need to keep in mind though is that the non-borrowing spouse, while protected from having to move in the event of the passing of the borrowing spouse, is not a party to the loan and therefore does not have all the rights of a borrower on the transaction.
In other words, if there is still a line of credit available of $100,000 at the time the older, borrowing spouse permanently leaves the home, the younger, non-borrowing spouse does not have access to the funds on the line of credit. Since they were never borrowed they would not be owed to the lender, but the remaining spouse would also not be able to access and use the funds.
Borrowers who know that the remaining spouse absolutely cannot maintain the home and their living expenses without the benefit of the reverse mortgage proceeds may need to think twice about whether or not this is a good loan for them (especially if other benefits such as pensions or retirement income from a spouse who has passed also ceases and they cannot access reverse mortgage proceeds).
4. You’re getting pressure from a broker, or you’re being encouraged to invest your reverse mortgage proceeds
A broker or lender should never try to influence your financial decision, and people licensed to broker reverse mortgages are prohibited from selling other financial products such as annuities. If you are receiving this kind of pressure from someone, it should be a red flag to seek another perspective and contact a trusted resource for more information.
If none of these situations apply to you, a reverse mortgage may be a good idea for you.