Reverse mortgages are loans that enable homeowners aged 62 and older to convert part of their home's equity into cash. They give you money -- in a lump sum, as regular payments, or as a line of credit -- and in exchange, you lose some of the equity in your home and pay insurance to protect the lender's investment in case you can't pay back the loan.
For some older homeowners, a reverse mortgage can be a good way to get some much-needed cash when their other sources of income aren't enough. But it's not always a good idea. If something goes wrong, you risk losing your home. And if you want to pass your home to your spouse or children when you die, a reverse mortgage could put this plan at risk.
Here are a few questions you should ask yourself to determine if a reverse mortgage is the right solution to your financial troubles.
Do you plan on leaving the home to anyone after you die?
When you take out a reverse mortgage, you don't have to pay anything back for as long as you're living primarily in the home and you can keep up with the property taxes, insurance, and other required costs. If you decide to move somewhere else for your retirement, or if you move to an assisted-living facility, the balance comes due, even if you don't sell the home at that time. If you remain in the home for the rest of your life, the balance must be paid upon your death.
Your heirs still can take possession of the house, but they must either pay off the balance of the reverse mortgage loan or qualify for a traditional mortgage on the home instead. If they don't want to keep your home themselves, they can always sell it and put the proceeds toward the loan. If they're unable to do so, the bank will sell the home. If the house sells for more than the balance of the loan, your heirs will inherit the difference. If it sells for less than what you owe, your mortgage insurance will cover it.
Because of these risks, it's generally not a smart move to take out a reverse mortgage if you intend to leave the home to someone after you die. But if you don't have any children or relatives you'd want to leave the house to, then this may not matter.
Who else do you share the house with?
If both you and your spouse are aged 62 or older, you can put both your names on the reverse mortgage. That means if one of you dies, the other will continue receiving payments and will not have to pay anything back until they die or move out. But things get trickier if your spouse is younger than 62 or if you have other people living in the home.
If you die, move, or go into a nursing home or assisted-living facility, then the other members of your household will have to move out. And there won't be anything you or anyone else can do about it unless you pay off the balance of the loan.
The one exception to this is non-borrowing spouses. If your spouse is not of age to qualify as a co-borrower on the reverse mortgage, they can still be listed as a non-borrowing spouse. If they were married to you at the time you took out the reverse mortgage, and they remain married to you up until the time of your death or departure from the home, they can keep living in the home without paying back the balance of the loan, provided it's their primary residence. However, because they're not the borrower on the reverse mortgage, they won't be able to collect any more money from it.
If you live with others, you should talk through your options with them to decide if a reverse mortgage is the best decision for your household. And if your spouse is close to turning 62, it may be worth waiting a little while so that they can be listed as a co-borrower.
How long do you plan to stay in the home?
Reverse mortgages don't make a lot of sense if you don't plan to be in your home for a long time. There are a lot of up-front costs, including loan origination fees, mortgage insurance, and closing costs. However, your lender may allow some of these to be rolled into the cost of the mortgage so you don't have to pay them out of pocket. The loan will accrue interest at a rate that often exceeds traditional mortgage interest rates. These costs can quickly add up to tens of thousands of dollars. If you turn around and sell your home in the next couple of years, you'll get less out of it, because you'll have to pay what you owe the bank first.
If you anticipate moving, or if you fear you may end up with a medical condition that requires you to move to a nursing home, then a reverse mortgage isn't right for you. You're better off selling your home and then downsizing or renting a place that's more affordable.
Can you afford to pay the ongoing costs?
When you take out a reverse mortgage, you must pay mortgage insurance, which protects the lender in the event you can't pay back what you borrow. This is usually somewhere between 0.5% and 2.5% of the value of your home up front, plus an ongoing premium that you must pay monthly after that.
You're also responsible for paying property taxes and doing any necessary maintenance to keep the home in good repair. If you fall behind on any of these payments, your lender is within its legal rights to call the balance of the reverse mortgage due. In that case, you must pay up, or the bank will foreclose upon the home.
Before you apply for a reverse mortgage, it's important to calculate how much you can expect to pay in mortgage insurance, property taxes, and home upkeep. Your lender should be able to give you some idea of what your mortgage insurance will cost. If you don't feel that you'll be able to pay for these expenses, a reverse mortgage isn't right for you.
Is there a better solution for you?
If you've decided that a reverse mortgage isn't the best choice for you, there still are other ways you can get the cash you need. Consider selling your home and downsizing or renting. You could also look for ways to cut back your spending or take on a part-time job to boost your income.
It's a good idea to consider all of your options before making a move. While a reverse mortgage can be the right choice in select circumstances, most people are better off looking for alternative ways to bring in cash that don't require them risking the roof over their heads.
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