A reverse mortgage is a loan, and as with any type of loan there are benefits and there can be downsides. Here, we will address some of the pros and cons associated with reverse mortgages for those qualifying individuals who are age 62 and older.
The reverse mortgage is a home loan that allows qualifying borrowers to borrow against their home equity. Most reverse mortgages are of the Home Equity Conversion Mortgage type, which means they are insured by the Federal Housing Administration and come with certain requirements.
First, the Upsides:
A reverse mortgage can offer many benefits to senior borrowers. Because the loan proceeds can be spent as the borrower chooses, a reverse mortgage can provide financial flexibility and freedom during retirement. For an individual or a couple that needs to make home modifications for aging in place, as an example, a reverse mortgage can help pay for improvements.
A reverse mortgage can even be used to purchase a new home through a specific type of reverse mortgage for purchase transactions. Some borrowers use their reverse mortgage proceeds to pay for in-home care costs or to help reduce the caregiver burden shouldered by children or other family members.
Others simply use the proceeds for a rainy day or an unforeseen health event.
HECM borrowers must pay insurance premiums associated with the loan, and as a result, FHA insurance provides some important borrower protections:
- Protections for some spouses of reverse mortgage borrowers
- The guarantee that a borrower and his or her heirs will never owe more to repay the loan than the home is worth at the time of sale
- That loan payments will be received as agreed upon under the terms of the loan
Reverse mortgage requirements:
- A borrower must have an age minimum of 62 years old
- Home equity must be sufficient to qualify (generally 50%)
- The borrower must maintain homeowner’s insurance and property tax payments as well as maintain the home to FHA standards
Weighing the downsides
Like any mortgage, a reverse mortgage carries some fixed costs such as closing costs and other fees. Reverse mortgages also require an upfront insurance premium and an ongoing insurance cost.
Some critics of reverse mortgages consider the costs to be a downside, but it is important to compare those costs with the alternatives, such as those that come with insurance products and other types of loans that may be available.
Costs Continue to be the Reverse Mortgage Downside:
- Fees — reverse mortgages have closing costs, like any mortgage
- Insurance premiums — FHA insurance is paid upfront and annually. It may help to compare the costs of reverse mortgage insurance versus other insurance products or other options you might be considering.
- Projected equity over time and inheritance for heirs — a reverse mortgage will draw down on equity over time
Another detriment is potentially drawing down home equity. If you intend to leave your heirs a home that is paid off in full, then a reverse mortgage may not be the best course of action. However, it’s important to note that any remaining equity that is left after the loan is paid off will be returned to the borrower or his or her heirs.
A reverse mortgage can be a prudent financial move, but the downsides should be considered. For those prospective borrowers who plan to move within several years, there may be a worthwhile alternative, as reverse mortgages are designed to help people who plan to remain in their homes.
What is the downside of a reverse mortgage?
Like any mortgage or financial products there are upsides and downsides. The downside to a reverse mortgage loan is that you are using your home’s equity while you are alive. After you pass, your heirs will receive less of an inheritance. Another possible downside would be regrets by taking a reverse mortgage too early in your retirement years. As you grow older your needs may change and eventually a downsize may be of interest. Make sure that you weigh all pros and cons and consult with your trusted advisor on whether a reverse mortgage is right for your circumstances.
Is a reverse mortgage ever a good idea?
A reverse mortgage loan can be a good idea for those looking to tap equity rather than pull from liquid assets in retirement. When utilized correctly, a reverse mortgage can also add a great deal of peace of mind, by adding additional income for a secure retirement. Many are using available proceeds to fund long-term care and age in place home improvements.
Can you lose your house with a reverse mortgage?
As with any mortgage there is a loan agreement that you must adhere to. Reverse mortgage underwriting guidelines require that the borrower maintain property charges and occupy their home as a primary residence. If you fail to do so, the loan servicer must call the loan do and payable and force the borrower to either refinance or sell the home. If your loan balance exceeds the current property value at a time of a default you may end up losing your home to foreclosure and have no equity remaining. As with any financial product, you should seek counsel from your trusted advisor and careful consideration and suitability should be discussed.
What happens to a reverse mortgage when you die?
Death of the last surviving borrower is a maturity event on a reverse mortgage loan which means the loan becomes due and payable. Your heirs will have 6 months to refinance the loan or up to 12 months by filing an extension to sell. Any remaining equity after the loan is repaid belongs to your heirs. If there is a shortfall in the loan amount to the current appraised value, you may rest assured, reverse mortgages are non-recourse in nature and therefore cannot transfer debt to your heirs or estate.
Is a reverse mortgage a scam?
Reverse mortgages are not a scam. Anyone who believes a national government insured mortgage program such as the HECM (Home Equity Conversion Mortgage) is a scam needs to educate themselves or come real with their audiences. Unfortunately, there are people like Dave Ramsey that spread this type of rhetoric and simply sensationalize a financial product for their own gain.
- Reverse mortgages allow borrowers to tap into their home in the form of a non-recourse loan
- These loans can offer financial benefits to senior borrowers offering increased cashflow during retirement years
- Reverse mortgages carry some risks and potential downsides, and therefore upfront research can help determine whether a reverse mortgage is the right fit for your situation
Where to learn more?
For anyone considering a reverse mortgage, it’s a good idea to consult a trusted advisor. A good place to start is looking at a simple reverse mortgage calculator to get an idea of the amount you may be able to borrow. Consult ARLO, the All Reverse Loan Optimizer to help gather some of the loan options available in the market today.