If your home equity is your biggest asset, you’re short on cash, and you don’t have any other viable way to get raise money you need for the expenses of daily life, you may want to take out a reverse mortgage. This action is not a decision to make lightly. It’s probably taken years of hard work to accumulate your home equity and taking out a reverse mortgage means spending a significant part of that equity on loan fees and interest.
1. A Solution for Long-Term Problems
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 it can provide a long-term solution to your financial problems.
Explore how much you could get with each of the payment options available for reverse mortgages. If none of them can provide the liquidity or large up-front sum you need, you’re probably better off avoiding this complicated loan 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 Plan to Move
You should plan on staying put in your home if you take out a reverse mortgage. For starters, a reverse mortgage comes with 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 comes to either 0.5% or 2.5% of your home’s appraised value, depending on the reverse mortgage payment plan you choose. And then there are closing costs, such as title insurance, a home appraisal, and a home inspection.
Why pay all that if you are just going to move in a few years? Furthermore, if you move, you’ll have to repay the mortgage, and depending on what you've spent of the cash you obtained by taking it out, you may not be able to do that, leaving you without a place to live.
3. You Can Afford Ongoing Costs
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.
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 homeowner’s 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 burned-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. Prospective buyers would pay a lower price than they would for similar houses in good repair in your neighborhood. The need to spend money to replace the roof and fix the water damage to return the home to a good condition may deter buyers altogether.
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 die first, they can’t receive any more reverse mortgage proceeds after you’re gone. If your reverse mortgage is set up as either a monthly income stream or a line of credit, your spouse might lose access to a source of income they were 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 that age is, the lower the amount you can initially borrow.
(For more, see Reverse Mortgage: Could Your Widow(er) Lose the House?)
If you and your spouse are each at least 62, getting a reverse mortgage might be a good choice. Use an online calculator that is focused on reverse mortgages and talk to prospective lenders or your reverse mortgage counselor about how the value 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. No Plans to Bequeath Your Home
Some people don’t choose to leave their home to anyone—except their spouse if they're married. If you don’t have children, or your kids are financially successful and inheriting your home won’t make a meaningful difference in their lives then you probably have no specific plans for bequeathing the home.
Maybe because you worked hard to pay for your home, you just want to cash in your equity and spend it all before you die. You’re perfectly entitled to do so.
Upon your death (or your spouse's death, if you go first – see item 4), your loan becomes due and payable. Heirs who want to take possession of the house have the opportunity to pay the reverse mortgage balance to the lender and take back the title. However, they can’t always do this. They may not have the cash or 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 has lent you through the reverse mortgage. Any positive balance between the sale proceeds and what you owed goes to your estate. If there’s a negative balance, Federal Housing Administration 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.
Considerations: 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 one, it may still be the best for your circumstances. Here are the ifs: if you will get enough proceeds from the loan to solve your financial problems, in the long run, plan to stay in your home long term, can afford the ongoing costs of homeownership, have a spouse who is 62 or older, and don’t plan to leave your home to anyone.
(For more, see How to Choose a Reverse Mortgage Payment Plan, Do You Qualify for a Reverse Mortgage?, Complete Guide to Reverse Mortgage, Comparing Reverse Mortgages vs. Forward Mortgages, Reverse Mortgage Types, Picking the Right Reverse Mortgage Lender, How to Choose a Reverse Mortgage Payment Plan, Reverse Mortgage or Home-Equity Loan?, 5 Top Alternatives to a Reverse Mortgage, 5 Signs a Reverse Mortgage Is a Bad Idea, How to Avoid Outliving Your Reverse Mortgage, A Look at Regulation of Reverse Mortgages, Rules for Obtaining an FHA Reverse Mortgage, Find the Top Reverse Mortgage Companies, Reverse Mortgage: Could Your Widow(er) Lose the House?, Beware of These Reverse Mortgage Scams, Reverse Mortgage Pitfalls)