Reverse Mortgages – Pros and Cons
If you believe Fred Thompson and Henry Winkler in the TV ads for reverse mortgages, they are too good to be true. While a reverse mortgage is a good option for some low income seniors who need funds for living expenses, it is not the only solution. An equity credit line, which has far lower closing costs, should be explored first, as well as subsidized senior housing, assisted living, or downsizing to a smaller home or condo. If you need funds for home health aides, you can apply for MassHealth or Veterans Aid and Attendance benefits. See my Elder Law page and Veterans Aid and Attendance Benefits article. If you don’t qualify for a credit line and need funds to stay in your home, you should consider a reverse mortgage.
You do not have to repay the loan or the interest during your lifetime
Your ability to repay or your age (as long as you are 62 or older) will not disqualify you
You can use the mortgage funds for whatever you wish
There are several different methods of receiving the funds (cash up front, credit line, equal monthly payments, or a combination of these payment methods)
The mortgage does not come due until all of the borrowers vacate the house or are deceased
The closing costs, including points (origination fee), counseling fee, and mortgage insurance are high compared to an equity credit line
The closing costs are paid out of the mortgage proceeds, which reduces the amount of funds available to you
Any existing mortgage or liens have to paid off from the mortgage proceeds
If you don’t make interest payments during the term of the loan, you will be paying interest on interest
Unlike other mortgages, the amount that you owe goes up each year
While the original loan amount is 50% of the value of your home, the final mortgage payment could leave almost nothing for you or your children when the house is sold
There are ongoing charges, like mortgage insurance
The Good Faith Estimate and loan documents are extremely confusing and difficult to understand (I know this from reviewing a client’s loan documents)
Conclusion: In spite of the negatives, a reverse mortgage may be your only option if you want to stay in your home, but don’t have the income or savings to pay your bills. You can use the mortgage proceeds for ongoing bills, major repairs, or for any other expense – no one is looking over your shoulder. If you plan on moving in a few years, the reverse mortgage is not cost effective. Keep in mind that a reverse mortgage can eat up most of the value of your home, leaving little or nothing for you or your children when the mortgage is paid off. For more information, go to www.HUD.gov and do a general search for “reverse mortgage”.