Reverse mortgages have been hyped as a great way for cash-strapped senior citizens to use the equity in their property to provide spending money without having to give up their homes. However, if it turns out that you aren’t a good candidate for a reverse mortgage, but you take one out anyway, it can lead to a number of problems, including foreclosure and a lack of assets to leave to your heirs.
Keep reading to find out if a reverse mortgage might be a good option for you.
A reverse mortgage is a particular type of loan that allows you convert some of the equity in your home into cash. This type of mortgage differs from regular mortgages in that the bank makes payments to you, rather than you paying the bank.
The most widely available reverse mortgage is the FHA's Home Equity Conversion Mortgage (HECM). With a reverse mortgage, you will receive the payments in the form of a lump sum, monthly amounts, or a line of credit. You can also get a combination of monthly installments and a line of credit.
Even though you don’t have to make monthly mortgage payments with a reverse mortgage loan, you do have to keep up with:
- property taxes
- hazard insurance premiums
- mortgage insurance, and
- home upkeep.
If you take out a reverse mortgage, the loan doesn’t have to be paid back until you die, move, or sell the home. (Learn more about reverse mortgages in Nolo’s article Reverse Mortgages for Retirees and Seniors.)
Who’s Eligible for a Reverse Mortgage
Generally, to get a reverse mortgage you must:
- be 62 years of age or older
- occupy the property as your principal residence, and
- have substantial equity in the property or own the home outright.
(Learn more about eligibility requirements for a HECM, the most common type of reverse mortgage available, from the Federal Housing Administration’s website at www.hud.gov. Run a search for “reverse mortgage” to find links to informative articles and eligibility criteria.)
Who Is a Good Candidate for a Reverse Mortgage?
To determine if you are a good candidate for a reverse mortgage, consider the following:
Your Income and Your Home’s Value
The main benefit to a reverse mortgage is that you can remain in the home while at the same time receiving an inflow of cash. If you are retired and receive a low income, but live in a very valuable home with significant equity (or one that is totally paid off) and want to remain there, taking out a reverse mortgage might make sense. On the downside, since you are using up the equity in your home, a reverse mortgage will deplete the assets that you can leave to your heirs.
How Long You Plan to Stay in the Home
Since reverse mortgage fees and costs tend to be high, if you plan to move out in the next year or so, it probably doesn't make financial sense to get a reverse mortgage. However, if you’re committed to staying in the home long-term and most of your net worth is tied up in your home, a reverse mortgage could help you cover your expenses.
Additionally, you can stay in the home even if the mortgage balance eventually exceeds the house’s value. And, since reverse mortgages are nonrecourse, the lender can’t come after you (or your estate) for a deficiency judgment after a foreclosure. (Learn more about deficiency judgments in Nolo’s article Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Don’t Forget About the Taxes, Insurance, and Maintenance
Keep in mind you’ll need to keep paying the taxes, insurance, and maintenance. If you don’t have sufficient income or savings to cover those costs after taking out the reverse mortgage, you could go into default on the loan and the lender may foreclose. (Learn more in Nolo’s article Foreclosure of Reverse Mortgages.)
Additionally, if at some point you determine that you can no longer handle the property’s upkeep and want to sell the home, you could be left with little proceeds after the sale with which to find a new place to live.
In the past, after a HECM borrower died, a non-borrowing surviving spouse (who was not named on the loan) was often told he or she had to repay the loan immediately or else the lender would foreclose on the property. For HECMs issued on or after August 4, 2014, the non-borrowing spouse can remain in the home after the borrower dies, and the loan repayment will be deferred, so long as certain criteria is met. For HECMs taken out prior to August 4, 2014, the lender can elect to assign the reverse mortgage to HUD (and the loan repayment will be deferred) when the older borrowing spouse dies. Or it can choose to foreclose. (Learn more in Nolo’s article New Rule – Spouses Not Named on Reverse Mortgages Are Protected From Foreclosure.)
Consider Your Health
Your health directly affects on how long you will be able to stay in your home. If you are relatively healthy, you could potentially live in the home for the rest of your life. This is particularly true if you can afford home health care. However, if you have certain degenerative diseases (such as Alzheimer’s or Parkinson’s) or they run in your family, it’s important to recognize that you may have to move into an assisted care facility at some point. Once you permanently move out of the home, the loan becomes due.
Learn More About Reverse Mortgages
If you’ve considered all of these factors and believe you’re a good candidate for a reverse mortgage, the next step is to educate yourself about the process and rules. New rules governing reverse mortgages went into effect in September 2013 that reduce the amount available to borrowers in the first year, and further rules pertaining to tax and insurance payments go into effect in 2015. (Learn more in Nolo’s article New Restrictions on Reverse Mortgages.)
Find out more about reverse mortgages at AARP’s website at www.aarp.org/revmort.
Also, be sure to watch out for reverse mortgage scams.