Is a Reverse Mortgage a Good Idea?

Drs Producoes / iStock/Getty Images
Drs Producoes / iStock/Getty Images

Homeownership is the foundation for many financial outlooks or the jumping-off point for what money moves you can make in retirement. Borrowing against it or using it as collateral can get you cash, but also comes with some risks. Before you make any big financial moves, make sure you speak to the lender so you know exactly what you are getting into.

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Types of Reverse Mortgages

There are the different types of reverse mortgages:

  • Home equity conversion mortgages, or HECM. These are insured by the Federal Housing Administration, or FHA.

  • Proprietary reverse mortgages. These are not FHA-insured.

  • Single-purpose reverse mortgage loans, which are offered by state and local governments.

Reverse Mortgage: An Overview

Reverse mortgages work by lending money to homeowners who have mostly or completely paid off their mortgages. This allows you to access funds through a home equity line of credit. Here are some key takeaways:

  • Eligibility: Only available to people over the age of 62, and must be on their primary residence.

  • Interest and fees: Added monthly, which can increase your debt balance.

  • Repayment: Typically paid after the home is sold, or when the primary resident moves or passes away.

  • Upfront costs: Reverse mortgages have high upfront costs, which may not be ideal for seniors or those planning to move soon.

  • Loan amount factors: Age, home value, interest rate, and FHA mortgage limits can affect the loan amount.

  • Impact on others: Consider how it will affect your partner, spouse, or beneficiaries.

  • Financial alignment: Be honest about your finances. If they align with this option, it can be a helpful tool for long-term retirement stability.

Reverse Mortgage Loans Pros and Cons

When you are dealing with loans, property or large sums of money, there are always benefits and drawbacks to how you get your money. If you are 62 or older and want to consider a reverse mortgage, be sure to weigh the pros and cons before deciding what’s right for you and your family.

Pros:

  • You keep the title and continue to live in your home as long as you make all your payments, including insurance premiums, property taxes, maintenance and upkeep.

  • There are no monthly mortgage payments. However, you do still have to pay other fees such as taxes and insurance on the house.

  • In general, the money from a reverse mortgage is not taxed, and you can use the cash at your discretion.

  • Neither you nor your beneficiaries are liable for any amount that is above the home’s value, since it is a non-recourse loan.

  • You can decide on how you receive the money and how it’s dispersed.

Cons:

  • You have to sell the home if you use all of the home equity and later realize you can no longer afford your house.

  • This can be much more expensive than other loan options or financial products, as it generally comes with high fees.

  • Your payments and mortgage insurance premiums can increase over time as interest and fees are added monthly.

  • It might not be ideal if you intend to move shortly. You’ll have to deal with many upfront costs.

  • You could lose your home if you don’t comply with the loan terms.

Can You Lose Your Home With a Reverse Mortgage?

Before you take on a reverse mortgage, the lender should make it very clear that if you don’t comply with the terms of the loan, you can lose your house. This can make this type of loan risky for you, your spouse or your heirs.

Some of these might include failing to pay property taxes, lack of maintenance and upkeep on the property, and or not living in the home as your primary residence.

In some cases, a spouse can stay in the home after the homeowner dies or moves to assisted living, however, be aware that the borrower is at risk for foreclosure if payments aren’t made.

Does AARP Support Reverse Mortgages?

The American Association of Retired Persons, or AARP for short, is a nonprofit and independent organization that helps guide people over 50 toward financial independence. Though they have never come out directly for or against reverse mortgages, here’s a statement about reverse mortgages from their website:

Reverse mortgages offer older homeowners a way to tap home equity to meet financial needs in retirement. However, the collapse of the mortgage market in 2008 through 2009 has led to major changes that impact consumer choices. While consumers have more product choices, reverse mortgages are generally more expensive and more complicated–leading to more scrutiny from Congress and regulatory agencies charged with protecting consumers.

Final Take To GO: Suze Orman On Reverse Mortgages

The bottom line is reverse mortgages tend to be time sensitive and you don’t want that time, or money, to run out. Though there are plenty of upsides and downsides Suze Orman tends to advise against reverse mortgages as she considers them too high a risk for many senior citizens. Orman said, “If you tap all your home equity through a reverse at 62 and then at 72 you realize you can’t really afford the home, you will have to sell the home.”

FAQ

  • What is the downside to a reverse mortgage?

    • There are many downsides to reverse mortgages such as:

      • You could lose your home if you don't comply with the loan terms.

      • You have to sell the home if you use all of the home equity and then realize you can no longer afford your house.

      • This can be much more expensive than other loan options or financial products as it generally comes with high fees.

      • Your payments and mortgage insurance premiums can increase over time as interest and fees are added monthly.

      • May not be ideal if you intend to move shortly as there are many upfront costs with this type of mortgage.

  • What are the benefits of a reverse mortgage?

    • There are many benefits to a reverse mortgage such as:

      • You keep the title and continue to live in your home as long as you make all your payments including, insurance premiums, property taxes, maintenance and upkeep.

      • You can decide on how you receive the money and how it's dispersed.

      • There are no monthly mortgage payments. However, you do still have to pay other fees such as taxes and insurance on the house.

      • In general, the money from a reverse mortgage is not taxed and you can use the cash at your discretion.

      • Neither you nor your beneficiaries are liable for any amount that surpasses the home's value as it is a non-recourse loan.

  • What does Suze Orman say about reverse mortgages?

    • In general, Suze Orman considers reverse mortgages to be a risky financial move. Orman goes on to state, "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home."

  • Do people lose their homes with a reverse mortgage?

    • Yes, it's possible to lose your home with a reverse mortgage if you don't comply with the loan terms. This is why the lender you work with should make it very clear that if you do not comply with the terms of the loan, you can lose your house, making it risky for you, your spouse or your heirs. In some cases, a spouse can stay in the home after the homeowner dies or moves to assisted living, however, be aware that the borrower is at risk for foreclosure if payments aren't made.

  • What does AARP think of reverse mortgages?

    • The AARP, or American Association of Retired Persons technically does not come out for or against reverse mortgages but here is a direct quote from AARP's website on the subject:

      • "Reverse mortgages offer older homeowners a way to tap home equity to meet financial needs in retirement. However, the collapse of the mortgage market in 2008 through 2009 has led to major changes that impact consumer choices. While consumers have more product choices, reverse mortgages are generally more expensive and more complicated- leading to more scrutiny from Congress and regulatory agencies charged with protecting consumers."

  • What is the Department of Housing and Urban Development?

    • The Department of Housing and Urban Development, or HUD, is the federal agency responsible for enforcing fair housing laws, creating programs that address housing needs, improving communities and other national policies.

This article originally appeared on GOBankingRates.com: Is a Reverse Mortgage a Good Idea?

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