They are marketed as a solution to seniors’ money problems or a way to more fully enjoy retirement. But reverse mortgages can be hard to understand, and the fees and interest can use up a substantial portion of a homeowner’s equity. For many older adults, there are better solutions to financial struggles. (Note: The guidelines in this article refer to home equity conversion mortgages (HECMs), which are backed by the Federal Housing Administration [FHA] and are the most popular type. For more on HECMs, see Rules for Obtaining an FHA Reverse Mortgage. To learn about the others, see What Are the Different Types of Reverse Mortgages?)
Here are five situations where a reverse mortgage is probably a bad idea.
1. You want to leave your home to your heirs.
When you pass away with a reverse mortgage in your name, the loan becomes due. To pay off the loan, the bank becomes the owner of your home by foreclosing on it, then sells your home to get back the money lent to you. If the home sells for more than your outstanding loan balance at the time of your death, the difference goes to your heirs. If it sells for less, nothing goes to your heirs, and FHA insurance covers the lender’s shortfall. That’s why borrowers have to pay mortgage insurance premiums on reverse home loans.
Taking out a reverse mortgage seriously complicates matters if you want to leave your home to your children (or other heirs) or if someone was hoping to inherit your home. Maybe you still live in the home you raised your daughter in, and she wants to raise her own family in it after you pass on. With a reverse mortgage, the only way your daughter will be able to keep the home in the family is to pay off the loan. Granted, she won’t have to pay more than the home is worth, even if your loan balance is higher than the home’s appraised value. But she might not be able to afford that expense out of pocket. She might not qualify for a traditional mortgage to buy the house, either, which would be another way to secure ownership. The family home would then be sold to a stranger to satisfy the reverse mortgage debt.
2. You live with someone.
Does a spouse, relative, roommate, friend or boarder live in the home you want to take out a reverse mortgage on? If so – and if that person is not on the loan with you – he or she won’t have a place to live after you pass away. That person won’t even be able to keep living there if you move out. One of the conditions of a reverse mortgage is that the borrower has to live in the home as his or her primary residence. If the borrower passes away, sells the home or moves out, the loan becomes due. And if someone living with you isn’t at least 62, he or she cannot be a borrower on the reverse mortgage.
These loan conditions shouldn’t stop you from getting a reverse mortgage if the person who lives with you could move out and rent another place. But it should give you pause if that person is a relative or your spouse, who has an emotional attachment to the home and depends financially on being able to live there. (For more on this subject, see Reverse Mortgage: Could Your Widow(er) Lose the House?)
3. You need the money for medical bills.
An expensive health condition can cause seniors to turn to reverse mortgages as a way to pay their medical bills.
“The funds can help if you are well enough to remain in your home,” says ReKeithen Miller, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Atlanta. However, if your health becomes so poor that you can no longer live in your home, you will need to repay the reverse mortgage because, as noted above, lenders require that borrowers live in the home as their primary residence. “That means you may need to repay the mortgage just at the point when you will likely need the funds the most,” Miller says.
Moving into a nursing home or assisted living for 12 months or more is considered a permanent move under reverse mortgage regulations. Borrowers are required to certify in writing each year that they still live in the home that they are borrowing against. If you can’t repay the reverse mortgage, the lender will foreclose on the home and sell it to repay the loan.
4. You might move soon.
If your health hasn’t been so great lately, consider whether you might be forced to move in the near future to be closer to loved ones who can take care of you or to live in a facility where you can get the level of care you need. (See How to Pick the Right Nursing Home and Alternatives to Nursing Homes for information on some of these options.)
If you’re thinking about moving – because of your health or for any other reason – a reverse mortgage is likely not a good idea. Its high upfront costs can make this loan a bad deal in the short run. These costs include lender fees, the biggest of which is the loan origination fee; up-front mortgage insurance and ongoing mortgage insurance premiums; and closing costs, also called settlement costs, which include property title insurance, a home appraisal fee and a home inspection fee.
A reverse mortgage becomes due if you move out or sell the property. You’ll then have six months to repay the loan. Any sale proceeds above what you owe are yours to keep, but you’d get a lot more from selling your home if you hadn’t recently paid thousands of dollars in reverse mortgage costs.
5. You can’t afford property taxes, homeowners insurance and home maintenance.
If, even with reverse mortgage proceeds, you will not be able to afford to keep up with your property taxes, pay your homeowners insurance premiums and maintain your home in good repair, you shouldn’t get a reverse mortgage. Failing to keep up in any of these areas means the lender can call the reverse mortgage due and you can lose your home. Some localities have property tax deferral programs for seniors that might solve your cash-flow problems. In fact, some of these programs are actually a little-used type of reverse mortgage called a single-purpose reverse mortgage. Also, some cities have programs to help low-income seniors with home repairs. But you’re on your own for homeowners insurance.
If you need money but a reverse mortgage seems like a bad idea, know that it’s not your only option. Selling your home and downsizing to something more affordable is one alternative. It may not be emotionally appealing, but it might alleviate your financial stress. You could use the proceeds to buy a less expensive house or condo with lower maintenance and utility expenses, or rent instead to avoid major home ownership costs such as property taxes, insurance and repairs. For more, see 5 Top Alternatives to a Reverse Mortgage.
It’s also a good idea to review each of your recurring expenses and look for ways to cut back. Could you use coupons and build your shopping list around sales to cut your food bill? Does your city have a property tax relief program for seniors? Other possibilities include getting a home-equity loan or home equity line of credit, or refinancing with a traditional forward mortgage. These options could provide funds if you can qualify for a loan and make the monthly payments. (Learn about the differences in Comparing Reverse Mortgages vs. Forward Mortgages and What are the differences between a home equity line of credit (HELOC) and a home equity loan?)