Reverse Mortgages Pros and Cons

house with striped awnings
Image by striatic used under the creative commons attribution license.

A reverse mortgage, with pros and cons either you way go, understandably has its fair share of both advocates and critics. A financial tool to help seniors pay for home improvements, stay in their home, and increase their standard of living, the downside of reverse mortgages for seniors is that the cost can be high. I recently met with a family who asked me to outline general reverse mortgage pros and cons and to help them talk with their aging parent about moving. The senior and her adult children shared with me their concerns about why they thought it was a good time for her to move. The mom—let’s call her Susan—recognized she needed some help with preparing meals and housekeeping, but really wanted to stay at home. The challenge was finding the money and the services to help Susan stay home for as long as possible, and in a way that would meet her daily needs and give her family some peace of mind, knowing that she would be safe. This gave us the opportunity to talk about the growing number of reverse mortgage pros and cons.

First, to be eligible, you must be over sixty-two years of age, own your home, and be living in it as your primary residence. The amount you are eligible for depends on your age, interest rates and the value of your home. Most reverse mortgages for seniors are set up so the home owner can receive monthly payments.

Advantages

  • Reverse mortgages for seniors can be set up as a monthly payment, line of credit or a lump sum—whatever works best.
  • No matter how the reverse mortgage is set up, the home owner does not make any monthly payments.
  • No monthly payment is due from the home owner unless he or she dies, moves or sells the home. At that time, the loan is due in full, plus interest and fees.
  • The home owner can receive monthly income from a reverse mortgage as long as he or she lives in the home as a primary residence. A home owner could potentially continue to receive monthly payments even after the loan balance is higher than the amount that the house is worth.
  • Neither the home owner nor his or her heirs will ever owe more than the home is worth, no matter how many payments are received or how high the interest rates become.
  • It’s fairly easy to qualify for this loan since credit scores and income are not part of the qualification process.

Disadvantages

  • Reverse mortgages for seniors have high closing costs. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. The interest rates are adjustable.
  • For seniors who depend on Medicaid or other state or federal programs, it’s important to consider if reverse mortgage payments will affect their eligibility.

The senior is required to attend counseling by an independent HUD counselor prior to receiving a reverse mortgage. These are complex loans and this is a measure of consumer protection, and this point should be high on your reverse mortgage pros and cons checklist.

 

 

Possible Alternatives to Reverse Mortgages for Seniors

Aside from the notable reverse mortgage pros and cons, there are also alternatives to be considered.

  • A line of equity may be an alternative. There are fewer fees, and the money is available on an as-needed basis, but it requires monthly payments.
  • Refinancing the home with a conventional mortgage may save mortgage insurance fees that a reverse mortgage would require. However, this too requires monthly payments.

As a potential consumer of any financial tool, be cautious and seek out accurate information before making a decision on reverse mortgages for seniors. If you are looking for information on a reverse mortgage, the pros and cons should be analyzed, though I suggest you talk with a HUD counselor or someone impartial. Reverse mortgage officers may be prone to selling only the advantages (neglecting to mention all of the reverse mortgage pros and cons) since they get paid when you take out a reverse mortgage. Real estate agents may be prone to selling only the disadvantages of them, as they get paid when you sell your home. Your best bet is to find an impartial advisor such as a financial planner (whose brokerage doesn’t sell reverse mortgages), an elder law attorney or a certified reverse mortgage counselor, all of whom will be able to share practical information on reverse mortgage pros and cons to help you make your decision.

 

 

Here are a few links of interest to help you get started:

AAG's Reverse Mortgage Calculator

Find a HUD Counselor

Find a HUD-Approved Reverse Mortgage Lender


over 1 year ago, said...

Update: The key is suitability. Is it right for your circumstances? California and now Utah have new laws that give the consumer tools and time to determine suitability before the application. Although both states call it a cooling off period it is really the dedicated time for the consumer to get help from trusted advisors to understand if this is right for you now and through retirement. This is a complex financial transaction there is no hurry to sign on the dotted line because there are lifelong consequences. FYI HUD counselors cannot give any advice about if it's right for you, and definitely no legal or financial advice. If a reverse mortgage is suitable at origination there is far less risk for consumers in the servicing and maturity. 95% of consumers I talk to are in crisis because a reverse mortgage was not suitable and they didn't understand the terms. Get everything told to you verbally in writing!


over 3 years ago, said...

Thanks - good information here. These loans are misunderstood, I think, especially in the media, I just published an article on Reverse Mortgage Risks and Rewards that your readers might appreciate at Partners4Prosperity: http://partners4prosperity.com/reverse-mortgage-risks-and-rewards-should-you-bank-on-your-home (BTW they do not sell reverse mortgages; the article is from the point of view of a financial advisor who recommends them for some clients.)


about 4 years ago, said...

Great article. Many seniors are going to find this to know update - http://www.reversemortgagelendersdirect.com/reverse-mortgages-pros-and-cons/


almost 5 years ago, said...

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about 5 years ago, said...

I was really excited when I learned about reverse mortgage but I have a lot of doubts on how it work, if those thousands calculators are telling me the truth of it .. but finally I manage to find some simples information on how reverse mortgage works thanks to rmld.net! Check their website! www.reversemortgagelendersdirect.com


almost 6 years ago, said...

I got some ideas and direction for reverse mortgages. I am thinking of obtaining one as I need a new roof and can't afford one on my limited budget.


about 6 years ago, said...

My husband suggested that I use my savings, CD, etc. buy a house with the money and then do a Reverse Mortgage. Would this be wise?


about 6 years ago, said...

Just to answer a few of the questions, both spouses need to be over 62. If one spouse dies the other can live in the house. The money can be paid as a lump sum or as monthly payments. If you choose monthly payments you will be paying less interest over time which is a savings unless you need the lump sum right away. Overall fees and costs have come down a lot and they are a good option for house rich seniors. I learned about reverse mortgages here: http://www.reversemortgageproscons.com


about 6 years ago, said...

my husband is 63yrs and I am 60 he wants a reverse mortgage i don't , what will happen if I out live him will I have to sale the home?


about 6 years ago, said...

what if one of the homeowners are not 62 years old yet can they still qualify for a reverse mortgage? What will happen if one spouse dies will the other spouse be able to remain in the home and receive payments? How will the money be paid to the homeowners?


over 6 years ago, said...

How do it work when you need some money to pay some bills. Will I be making payment on the loan or how will it work


over 6 years ago, said...

If it is a double wide, is newer than 1978 and meets FHA guidelines. A foundation inspection also must be done.


over 6 years ago, said...

Just to add clarification to some of your points of information.... -when the senior passes, the heirs are given time to either sell the home or refinance the home if they wish to keep the property. -reverse mortgages are offered with FIXED rates. -you mention getting a line of credit or doing a regular refinance as an alternative, most seniors do not have the income or credit to qualify for either of those programs. -the newer FIXED rate reverses have lower closing costs which allow more money to the senior.


over 6 years ago, said...

Can a reverse mortgage be applied to a mobile home?