Every once in a while, I'm asked what I think about reverse mortgages. I believe most people not only don't understand them, but they really just want to know if they are good or bad. As with most financial decisions, it's not really a matter of, are reverse mortgages good or bad, but rather, is a reverse mortgage right for them. So, let me break it down into some simple pros and cons for this potential financial decision.
• A reverse mortgage will allow you to live in your home free of all mortgage payments for the rest of your life, and you don't have to have an income check or credit check.
• As long as you live in the house, you are eligible to receive monthly payments through your reverse mortgage. You can use this money for anything you want, and it's tax free, as well.
• These programs are government-insured so you don't have to worry about your check coming in every month. If the lender fails to send a monthly check, you are eligible for that money, as well as a late fee.
• One of the "selling points" that has been advertised heavily is that a reverse mortgage can protect homeowners from the consequences of falling home prices. If the value of the home drops after the loan is set up, it will not affect the equity value assessed for the life of the loan.
• Perhaps the best thing of all is that someone with limited income is now able to tap into their home equity and get increased income as long as they live in the home.
• Reverse mortgages have higher up-front fees than other types of financing. You will have to pay not only an origination fee and closing costs, but mortgage insurance, as well. These costs can add up to thousands of dollars.
• Unlike a traditional mortgage, where the balance gets lower and lower over time, with a reverse mortgage, no payments are being made on the loan. This means the loan balance simply gets larger over time depending on how much money is drawn from the home's equity. At the end of the loan, when the homeowner moves from the property or the premises are vacated upon the borrower's death, the value of the estate decreases based on the pay-off value of the reverse mortgage loan. Your heirs will pay off the mortgage by selling the home and will only inherit the remaining money after the reverse mortgage lender has the loan satisfied. This will likely leave less money to your heirs, but those heirs will not be personally liable if the home sells for less than the value of the mortgage. The mortgage lender has to claim a loss and request reimbursement from the Federal Housing Administration.
• Something many seniors may not be aware of with regard to reverse mortgages is that these loans can affect eligibility for some need-based programs. Although Social Security and Medicare are not affected, Medicaid and other government assistance programs can be affected if a senior has a surplus of funds from a reverse mortgage at the end of the month.
I think it's important to remember that a reverse mortgage is a long-term solution. If you are looking for a short-term loan, or fix, it's probably not a good choice. Also, you will likely be turned down if you are in a new house. Lenders like to see a least a year in the home before approval.
Your best choice is to start by working with a good financial planner to see if there are other options for you to explore. That being said; reverse mortgages have proved to be a life saver for some seniors.