The main reason to take out a reverse mortgage is that your home equity is your biggest asset, you’re short on cash and you don’t have any other viable way to get the money you need for the expenses of daily life. This is not a decision to make lightly, though. It’s likely taken you years of hard work to accumulate your home equity and taking out a reverse mortgage means spending a significant part of that equity on loanfees and interest. Also, reverse home loans are more complex than regular, “forward” home loans – the kind you get when you buy or refinance a house.
5 Reasons to Say “Yes”
If the following five criteria describe your situation, a reverse mortgage might be a good idea for you.
1. You’ll get enough proceeds to solve your financial problems long term.
To qualify for a reverse mortgage, you must either own your home outright or be close to paying it off. In other words, you need to have enough equity that a reverse mortgage will leave you with a reasonable lump sum, monthly payment or line of credit after paying off your existing mortgage balance, if you have one.
Getting quotes from three reverse mortgage lenders and going through reverse mortgage counseling should give you a good idea of whether a reverse mortgage can provide a long-term solution to your financial problems.
Explore how much you could get with each of the payment options. If none of them can provide the liquidity or the large up-front sum you need, you’re probably better off avoiding this complicated loan and its high up-front costs and looking for another way to fix your money troubles. Selling your home, for example, would let you cash out all of your equity instead of just a percentage of it. Renting or moving in with a family member might be a better solution. It would be a waste of your hard-earned home equity to take out a reverse mortgage only to find yourself facing the same financial problems in just a few years.
2. You don’t want to move and staying in your home is your long-term plan.
Staying put can make taking out a reverse mortgage worth it. Not so, if you plan to move in the near future, thanks to those high up-front costs. There are lender fees such as the origination fee, which can be as high as $6,000, depending on your home’s value; up-front mortgage insurance, which is either 0.5% or 2.5% of your home’s appraised value, depending on the reverse mortgage payment plan you choose; and closing costs such as title insurance, a home appraisal and a home inspection. If you move, you’ll have to repay the reverse mortgage, and you don’t want to spend thousands of dollars on a loan you’re not going to keep for a long time.
3. You can afford ongoing property taxes, homeowners insurance and home maintenance.
Keeping up with your property taxes, homeowners insurance and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable. Here’s why:
• If you don’t pay your property taxes for long enough, the county tax authorities can place a lien on your home, take possession and sell it to recoup the taxes owed. The tax authority’s claim to your property supersedes the lender’s, so if you don’t pay your property taxes, you’re putting the lender’s collateral (your house) at risk.
• Not paying your homeowners insurance premiums also puts the lender’s collateral at risk because if your house burns down, there’s no insurance to pay the costs of rebuilding. Your lender doesn’t want to get stuck with a burnt-out shell of a home that isn’t worth nearly what you owe on the reverse mortgage.
• Not keeping up with home maintenance also causes your home to lose value. If you don’t replace a failing roof, for example, your home could end up with extensive water damage after it rains or snows. Anyone who might consider buying your house would pay much less than what similar houses in good repair recently sold for in your neighborhood because they’ll have to spend a lot to replace the roof and fix the water damage in order to return the home to good condition.
4. Your spouse is 62 or older.
Any borrower on a reverse mortgage must be at least 62 years old. If you’re married and your spouse isn’t yet 62, getting a reverse mortgage is not ideal. While new laws protect your non-borrowing spouse from losing the home if you pass away first, he or she can’t receive any more reverse mortgage proceeds after you die. If your reverse mortgage is set up as a monthly income stream or a line of credit, your spouse might lose access to a source of income he or she was depending on. Also, reverse mortgage proceeds are based on the youngest spouse’s age, whether that person is on the loan or not. The younger you or your spouse is, the lower the amount you can initially borrow.
If you and your spouse are each at least 62, getting a reverse mortgage might be a good choice. Use an online reverse mortgage calculator and talk to prospective lenders or your reverse mortgage counselor about how the amount of proceeds you will get changes as you get older. If you don’t need the money immediately, postponing this loan may be a good way to increase the proceeds (interest rates and home values also determine your proceeds). And between now and then, you might find another solution to your financial concerns.
5. You don’t plan to leave your home to anyone.
Some people don’t choose to leave their home to anyone. Maybe you don’t have children, or your children are financially successful and inheriting your home won’t make a meaningful difference in their lives. Maybe you have children, but since you worked hard to pay for your home, you want to cash in your equity through a reverse mortgage or other option and spend it all before you die. You’re perfectly entitled to do so.
When you have a reverse mortgage and you pass away, the loan becomes due and payable. For homeowners who have heirs who want to take possession of the house, the heirs have the opportunity to pay the reverse mortgage balance to the lender and take back the title. However, they can’t always do this because they may not have the cash or they may not qualify to get a regular mortgage to buy your home. If your heirs don’t purchase the home, the lender will sell it on the open market to recoup the money it’s lent you through the reverse mortgage. Any positive balance between the sale proceeds and what you owed goes to your estate, and if there’s a negative balance, FHA insurance covers it. So if you’re not concerned about leaving your home to anyone, getting a reverse mortgage might be a good way to get cash.
The Bottom Line
Reverse mortgages are widely criticized, and with good reason, but that doesn’t mean they’re a bad deal for every homeowner in every situation. Even if a reverse mortgage is an expensive option and not an ideal option, it may still be the best option for your circumstances if you’ll get enough proceeds from the loan to solve your financial problems in the long run, if you plan to stay in your home long term, if you can afford the ongoing costs of home ownership, if your spouse is 62 or older and if you don’t want to leave your home to anyone.