A reverse mortgage can be a viable solution for the right homeowner—primarily seeking a way to age in place effectively.
Available to people age 62 or older who have built up a substantial amount of equity in their homes, reverse mortgages allow borrowers to wipe out their mortgage payments. They can also serve as a means to generate additional cash flow in retirement.
But reverse mortgages are not suitable for everyone; there’s a downside to reverse mortgage loans. Here are some telltale signs that another financial solution may be better 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 later.
If you want to move in the near term, whether closer to family or to a residence 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.
A reverse mortgage type is available, the Reverse Mortgage for home purchase, which 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 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 any Federal Housing Administration-insured mortgage, a reverse mortgage specifies that the home must be maintained to FHA’s standards.
If you have mobility challenges and cannot 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 chooses, including property maintenance.
3. Your spouse lives with you but does not qualify for a reverse mortgage
HUD Changed its rules in 2014 so that if your spouse is not 62 when you obtain a reverse mortgage, you can still get the loan in the older spouse’s name only.
The younger spouse is no longer forced to leave home at the time of passing of the older spouse, provided that the younger spouse was a non-borrowing spouse when the loan was initially taken out (this 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. The title is passed to the remaining spouse.
Because they are no longer forced to leave, the younger spouse’s age will now be considered to determine the benefit, and borrowers with younger spouses will receive less money.
Homeowners need to remember 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 when the older, borrowing spouse permanently leaves 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 be unable 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 cease 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.
Do people lose their homes with a reverse mortgage?
A Reverse mortgage is a loan, and the borrower has obligations to keep the loan in good standing. The requirements are that the property must be your primary residence, and you must pay your property taxes and homeowners insurance as well as keep the home in a reasonable manner. Failure to meet these obligations could result in the loan being called due and payable, with the possibility of losing your home at a foreclosure sale.
Who benefits most from a reverse mortgage?
The borrower on the reverse mortgage benefits most from the loan program. The reverse mortgage allows a homeowner age 62 or older to borrow money without the burden of a mandatory monthly mortgage payment, allowing them to remain in their home.
What are common mistakes when people use reverse mortgages?
Some of the most common mistakes center around the timing of obtaining the reverse mortgage and utilization of the available proceeds. When it comes to the proceeds, the biggest mistake is when a homeowner spends the available proceeds too quickly, leaving them with insufficient funds later in life to access. Regarding the timing of obtaining a reverse mortgage, there is such a thing as waiting too long to obtain one. Given their financial situation, many homeowners will wait until it is or almost is too late to apply for the loan. The reverse mortgage should be a consideration early in the retirement planning process. A reverse mortgage with a low balance and larger line of credit will benefit significantly from the line of credit growth rate providing even more available proceeds down the road.