Reverse Mortgage: The Pros and Cons
|Typical Reverse Mortgage Closing Costs|
|Loan origination fee||Up to $6,000||Based on property value and may vary by lender|
|Up-front mortgage insurance premium||Up to 3.0% of the maximum claim amount||Depends on reverse mortgage payment plan|
|Title report and insurance||$1,000||Borrowers can shop for this service to save money|
|Appraisal||$500||Cost varies by location and property characteristics|
|HECM counseling||$125||Fee waived for borrowers who can’t afford it|
|Recording fees and taxes||Varies||Assessed locally|
|Flood certification and monitoring||$60||Examines flood risk and determines flood insurance requirements|
|Credit report||$30||Used for borrower financial assessment|
|Repairs||Varies||Required if the home doesn’t meet the FHA’s minimum property standards|
Table sources: Code of Federal Regulations, 24 CFR §206.25; Code of Federal Regulations, 24 CFR §206.31; Code of Federal Regulations, 24 CFR §206.105; Free and Clear, “Why am I being charged a flood certification fee when the home I am getting a mortgage on is not located on a flood plain?”
It may not make financial sense to pay these sums if you’re going to move before the loan’s financial benefits outweigh the costs. Moving is one of the events that makes your reverse mortgage due and payable. After paying seller fees and repaying your HECM, the proceeds from selling your house may not be enough to support your next step, whether it’s downsizing, assisted living, or paying a relative for caregiving.
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. Though new laws may protect your non-borrowing spouse from losing the home if you die first, non-borrowers can’t get money from the loan after the borrower dies. That means no more credit draws or monthly payments. The surviving spouse might lose an important source of income.
If you and your spouse are each 62 or older and named as owners on your home’s title, getting a reverse mortgage together might be a good choice.
You Can Meet the Financial and Physical Requirements of Home Ownership
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, the county tax authorities can place a lien on your home, take possession of it, 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. That’s why lenders require borrowers to stay current on taxes.
Some localities offer property-tax deferral and home repair assistance programs to help homeowners ages 65 and older with their cash flow. In addition, some homeowners insurance companies may offer premium discounts to retirees.
Not paying your homeowners insurance premiums also puts the lender’s collateral at risk. 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.
Deferring home maintenance 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.
During the reverse mortgage financial assessment that’s part of the HECM application process, prospective lenders will determine whether you have the capacity to keep up with these obligations. If you don’t, they’ll reduce how much you can borrow and put that money in an escrow account so they can keep you current on your bills. But you’ll still need enough physical ability, or cognitive ability plus money, to keep your home in good condition.
Your Home Is Just an Asset
Some homes have sentimental value. If your home has been in the family for decades or generations, you children might hope to keep it that way.
While there are ways for heirs to pay off a reverse mortgage and keep the house, the loan does complicate things. If your home is just an asset, though, then leveraging it for a more comfortable retirement might be the best way to use it.
When a Reverse Mortgage Doesn’t Makes Sense
We’ve already touched on some scenarios when a reverse mortgage may be the wrong choice: you’re not sure how long you’ll keep living in the home, your spouse can’t be a co-borrower, you’d struggle to maintain the home, or the home has sentimental value to your loved ones. Let’s further discuss some scenarios where a reverse mortgage might not suit your circumstances.
You Don’t Have Enough Equity
To qualify for a reverse mortgage, you must either own your home outright or have about 50% equity, at least. The percentage isn’t set by law, because exactly how much equity you need to qualify is tied to the other factors that affect how much you can borrow: your age, the payment plan you want, and interest rates.
You need to have enough equity so 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 (provided you still have one).
Getting quotes from at least three lenders and going through reverse mortgage counseling will tell you whether you have enough equity and how much you could borrow with each reverse mortgage payment option. If none provides the cash you need, an alternative might help you more.
For example, selling your home would allow you to cash out all of your equity, rather than just a percentage of it (as is the case with a reverse mortgage). Buying a less expensive home, renting, or moving in with a family member might be a better solution.
Someone Lives with You
If you have friends, relatives, or roommates living with you and they’re not co-borrowers on your reverse mortgage, they’ll need to be prepared to move out if you die before them. Your co-residents may also have to vacate the home if you move out for more than a year. (There are exceptions for eligible non-borrowing spouses.)
Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. Seniors often make unplanned moves for medical reasons, and household members should be aware of this possibility.
Reverse mortgages require borrowers to live in the home as their primary residence. In fact, borrowers have to certify in writing each year that they still live in the home they’re borrowing against in order to avoid foreclosure.
If someone relies on you for housing (and you’re okay with continuing that arrangement), you may want to forego the reverse mortgage and leave your home to them in your will or trust. Adding someone to your home’s title will not protect them from reverse mortgage foreclosure (and may create new problems, too).
Your Home Has Sentimental Value
When the last reverse mortgage borrower dies, the loan becomes due and payable. Heirs who want to keep the house have the opportunity to pay the reverse mortgage balance to the lender. They’ll need cash or another mortgage to pay off the loan.
If your heirs can’t or won’t repay the loan, the lender will sell the home to recoup what the borrower owed. Any positive balance between the sale proceeds and the loan balance goes to the borrower’s estate. If there’s a negative balance, Federal Housing Administration insurance covers it. The heirs receive nothing, but they don’t owe anything, either.
You Have Health Challenges
Retirement-age homeowners with health issues might consider a reverse mortgage to raise cash for medical bills. However, if your health declines to the point where you must relocate, the loan must be repaid in full because the home no longer qualifies as the borrower’s primary residence. If you might have to move due to health or disability, a reverse mortgage is probably unwise because, in the short run, its upfront costs are unlikely to pay off.
Homeowners who suddenly vacate or sell the property generally have just six months to repay the loan. And though borrowers may pocket any sales proceeds above the balance owed on the loan, thousands of dollars in reverse mortgage costs will have already been paid out.
What Are the Costs of a Reverse Mortgage?
Home equity conversion mortgages (HECMs), the most common type of reverse mortgage, have a number of one-time fees and ongoing costs. The most significant of these are origination fees, other closing costs, and mortgage insurance premiums, along with the interest the borrower accumulates on the loan balance.
Can You Walk Away from a Reverse Mortgage?
If your loan balance exceeds your home’s value and you can no longer stay in your home, you have a couple of choices. You can do a deed in lieu of foreclosure or walk away and let the lender foreclose. Reverse mortgage loans are non-recourse and their debt cannot transfer to your estate or heirs.
When Do I Have to Repay a Reverse Mortgage?
Generally, reverse mortgage loans must be repaid when you move out of the home, sell the home, or you die. However, the lender can also require the loan to be repaid if you don’t pay your property taxes or homeowners insurance, or if you stop taking care of your home.
Can I Change My Mind After I Sign?
“With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty,” according to the Federal Trade Commission. “To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.”
The Bottom Line
No matter what your situation is now, consider how it might change in the future. Will a reverse mortgage help you or harm you under these different scenarios?
Reverse mortgages aren’t an ideal financial choice for everyone, and you may have other options, such as selling your home and downsizing. Older homeowners may also consider renting, which alleviates homeownership headaches like property taxes and repairs. Other possibilities include forward mortgages such as home equity loans, home equity lines of credit (HELOCs), or cash-out refinancing, though all of these require good credit and enough income or assets to support monthly payments.
Reverse mortgages, particularly the line of credit payment plan, can also be helpful in many situations. They can provide a source of emergency funds or income diversification, they can help pay for in-home care, and they’re a source of nontaxable income (because the money is a loan), so they won’t increase your income tax rate or Medicare premiums.
Even if a reverse mortgage is an expensive option and not an ideal one, it may still be the best choice for your circumstances. Here are the ifs: If the proceeds from the loan will increase your long-term financial stability, if you plan to stay in your home for many years, if you can afford the ongoing costs of homeownership, if you have a spouse who is 62 or older—and if you don’t plan to leave your home to anyone.