Is a Reverse Mortgage Right for You?

Whether through recent news articles or over the water cooler, you've probably heard something about reverse mortgages. But if you (or a loved one) is considering this type of loan, don't base your opinion on hearsay. For such a major financial decision, it's worth getting the facts about reverse mortgages. This type of mortgage can actually be a valuable option for people in the right circumstances and who understand the terms of the deal.

Reverse mortgages convert home-equity into cash
What is a reverse mortgage? If you own a home and are 62 or older, a reverse mortgage is a way to convert some of your home equity into cash. Rather than make monthly payments to your lender, your lender is making payments to you. The money you borrow through a reverse mortgage is paid back, with interest, when you move out of your home, sell your home, or die.

The older you are and the more valuable your home, the lower the interest rate you can get in a reverse mortgage — meaning you can borrow more money.

Why and how do people use the money borrowed through a reverse mortgage? Cashing out home equity in this way can be helpful if you have a fixed income and need more money to pay for household bills, debt, medical costs, home repairs, or other expenses. The money from a reverse mortgage can be paid out as a lump sum, in regular payments, or as a line of credit.

Unlike with traditional mortgage loans, your credit history does not matter with a reverse mortgage. However, the house must be your primary residence, so vacation homes and investment properties do not qualify.

Effect on taxes and government program eligibility
If you're concerned that the additional money will boost your income tax liability, don't be. Money obtained through a reverse mortgage loan is not considered taxable income. You also keep the title to the home and can never be forced to move as long as you pay the property taxes and insurance. If you and your spouse take out a reverse mortgage together, the loan isn't due until both spouses have moved or died.

If you receive regular Social Security or Medicare payments, they won't be affected by taking out a reverse mortgage. However, your eligibility for Medicaid payments could be affected. Money received from a reverse loan may be considered an asset and could keep you from getting Medicaid.

For example, if you receive $4,000 from a reverse mortgage and spend it all the same calendar month, you can receive Medicaid, according to the National Reverse Mortgage Lenders Association. If you spend some of it and put the rest in your savings account, that's where you can run into problems. If your total liquid assets exceed $2,000 ($3,000 for couples) the next month, you wouldn't be able to receive Medicaid.

Are you a spendthrift?
One of the disadvantages of a reverse mortgage is that getting money this way won't correct poor spending habits. If you have trouble managing your money, a reverse mortgage won't solve your financial problems.

For some folks, getting their hands on a large sum of cash may result in poor spending choices that could leave them without enough money for basic living expenses later on. Who hasn't heard horror stories of retirees blowing reverse mortgage money in record time on expensive vacations, meals, cars, and other frivolous purchases? Anyone who really has a problem with debt and managing money may need to speak with a credit counselor.

Credit counseling differs from reverse mortgage counseling, which is mandatory for most reverse loans. This free or low-cost counseling can be done in person or by phone. The goal of counseling is to get detailed reverse mortgage information to help you decide if using one of these loans is a wise choice. Counseling can help you review other alternatives to getting a reverse loan. Find a HUD-approved counselor to talk through your options. Seniors who use reverse mortgages can reap a lot of benefits, but these loans aren't for everyone.

Your home appraisal
You may not benefit much from a reverse loan if you don't have enough home equity. When you apply for a reverse mortgage, your home will be appraised to determine its current market value. The more equity you have in your home, the more money you can potentially receive through a reverse mortgage. After the past year's market performance, it's worth noting that no matter what happens with the housing market, the amount owed on a reverse mortgage never exceeds its market value at the time a house is sold.

Just make sure you really want to cash out that home equity. When you own a home free and clear, you can leave it to your heirs without too many restrictions in most cases. But with a reverse mortgage, one of the disadvantages is that if you want your heirs to have the home, they (or your estate) must pay off the loan balance first. They also could choose to sell the home and keep any remaining equity after repaying the lender. If they don't want the home, they can do nothing and the mortgage lender takes the property.

Reverse mortgage disadvantages: Loan fees
Reverse mortgages usually have a lot of upfront costs, so you may want to consider other alternatives to getting more funds if you plan to move from your home in a few years. Some other ways to improve your cash flow are to redo your budget to reduce expenses, get a home equity loan or no-interest loan from a local government agency or nonprofit, or look for grants for homeowners in your area.

One thing to remember is that the US Department of Housing and Urban Development's Home Equity Conversion Mortgage (HECM) allows you to use the proceeds from to buy another home as your primary residence. So you can use the money from a reverse mortgage to downsize to a less expensive place.

Get the reverse mortgage facts to help you decide
As more seniors have struggled to make ends meet in recent years, reverse mortgages have grown in popularity. Some consumer advocates and legislators say reverse home loans are heading for another meltdown like subprime mortgage loans. Others believe that these loans have a lot of value and can help seniors live more comfortably in their golden years.

It's up to you to make the right decision based on your personal financial situation. And don't let pushy salespeople pressure you into signing up for a reverse mortgage without understanding all the consequences. Talk to a counselor to discuss reverse mortgage facts and whether one makes sense for your needs.

J.D.'s note: I know absolutely nothing about reverse mortgages. In fact, before doing research for my book, I had vaguely negative feelings about them. But lots of financial experts I trust think they're a good option — in some cases. Do YOU know anyone who's taken out a reverse mortgage? Are they glad they did? Or do they wish they hadn't?

More about...Home & Garden, Retirement

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Mrs. Money
Mrs. Money
10 years ago

I don’t personally know anyone who has taken out a reverse mortgage but I sure have seen a lot of commercials for them!

I manage a bank and we get a lot of elderly customers at my branch. Many of them are doing home equity lines of credit right now. We don’t offer a reverse mortgage at the branch. It’s interesting to see the rise in equity lines in the elderly group!

lostAnnfound
lostAnnfound
10 years ago

My parents looked into this option & did some research. My father was turned off by the upfront fees, talking thousands of dollars. His take is why should I pay that much in fees & interest to boot when I can get a home equity loan or LOC for a lot less. Of course, as stated in the article, if you have bad spending habits, neither option might be a good idea. When my folks did the home equity they opened a separate checking account and put the money in there to keep it separate from other money. One extra… Read more »

ami | 40daystochange
ami | 40daystochange
10 years ago

I’m with you, J.D. I don’t know a lot about them, but I have a vaguely negative feeling about them. That being said, I think they *could* provide a great opportunity for some older customers to obtain some extra monthly cash IF those customers – and their families – understand the fees, interest and structure of a reverse mortgage, perhaps after researching other options or discussing them with a financial planner. DH manages financial affairs for an elderly man, and we’ve discussed whether a reverse mortgage could help him with his finances. So far he’s managing on SSI and a… Read more »

Donna Hackman
Donna Hackman
6 years ago

To downsize, using a Reverse Mortgage for Purchase, you can do it all in one transaction saving on fees. Let’s say you sell your home for $140,000, you can use $70,000 of the proceeds to purchase a 140,000 condo and put the rest of your money in the bank for when you need it. The reverse mortgage is on the new property. That gives you a place to live and cash for the things you want or need.

Sara A.
Sara A.
10 years ago

My grandpa (who is a widower) looked into a reverse mortgage when his retirement savings took a hit because of the stock market.

But then he decided to sell his house. And move in to a smaller place with a roommate. He is much happier- has less to take care of, someone to keep him company, and he lowered his costs and got his equity out of his house.

Donna
Donna
6 years ago
Reply to  Sara A.

My Mother who is a widow got a reverse mortgage and is very happy with it. She did not want a roommate, nor did she want to leave her home. We (the six children) do not care about getting an inheritance. We want our Mother to enjoy her retirement.

HollyP
HollyP
10 years ago

Thanks for posting this article. This is an important issue for even younger people to be aware of, as they may have parents or other relatives who consider this option.

On a related note, I’d love to see a posting on long term care insurance. People should be thinking about buying it in their 40s, but most don’t think about it until it is too late.

Which reminds me, I really should start doing the research for myself…

Merry Christmas to those who celebrate it, and a happy day to those who don’t.

CarA
CarA
10 years ago

J.D. —
In response to your question, I have always thought negatively about them as well. But recently, my father informed me that he was is in the process of obtaining a reverse mortgage on his home. His decision made me be more open minded because I’ve always been impressed with my father’s financial investment decisions.
Merry Christmas to everyone!
CarA

Tyler
Tyler
10 years ago

I know as little about them as you do, JD, but my first impression is: Sounds like a real pain in the ass to deal with for the family that has to manage that once you’re gone.

How does a reverse mortgage work in a a period of declining home values?

Donna
Donna
6 years ago
Reply to  Tyler

When the people permanently leave the home, the family can put the house up for sale and the heirs get the difference after the loan is paid. If there is no equity left in the home, the family just simply lets the bank have it and deal with the sale.

Donna
Donna
6 years ago
Reply to  Tyler

You can never leave a debt to your family. The house is the repayment, even if there is more owed on the home than what it is worth.

George
George
10 years ago

Reverse mortgages simply automatically borrow money from your home’s equity each month. Doesn’t sound like a good deal to me. It’s a win for the company because they are making money.

Great post!

Nicole
Nicole
10 years ago

I also don’t know anybody who has done one, but I know people who do research on why more people don’t take out reverse mortgages. From a rational optimality standpoint, they’re generally considered to be a good deal for people who want to stay in their homes, except for the fees (which can be excessive), and assuming no bequest motive. (And the idea is the fees would be lower if more people used this option because there would be more competition in the reverse mortgage market.) Presumably the Medicaid eligibility isn’t a problem for a widow(er), as they would have… Read more »

Kristen@TheFrugalGirl
10 years ago

Tyler, I was thinking about that too…wondering how difficult it is to take care of all the details after the homeowners pass away.

Gina Gwozdz
Gina Gwozdz
10 years ago

This was a very well written article on the overview of reverse mortgages. One option that they did not mention, which I wrote about in my blog back in 2006 (when more people had equity and cash) is to have a family member provide the reverse mortgage (
http://glgcpa.blogspot.com/2006/09/family-reverse-mortgage.html). This option can drastically reduce the upfront costs and allow an easy way to keep the home in the family.

bill
bill
10 years ago

There is another word for reverse mortgages — Usury! It is nearly always a bad financial move with fees running 8% – 10%. Lenders even set aside fees from the proceeds to service the loan going forward. This should be considered only when folks are desperate and all other options have been explored.

Donna
Donna
6 years ago
Reply to  bill

I disagree. This is a great retirement financial planning tool. People just aren’t educated on them.

Adam
Adam
10 years ago

I don’t think 8% – 10% interest rates are bad at all considering the potential for appreciation in the housing market.

Tomas Stonkus
Tomas Stonkus
10 years ago

Reverse mortgage is good if you need cash right away, but from what other readers have suggested there are plenty of other ways of acquiring the needed cash. Essentially you are loosing equity and gaining debt, not a very cool situation. Especially if you are 62, then you have to think of your children as well. What if you want to pass the house on to your children? If you choose the reverse mortgage option, you will leave them only with more debt. I am sure reverse mortgages have some uses in certain situations, but overall it seems like it… Read more »

Donna
Donna
6 years ago
Reply to  Tomas Stonkus

If you want to pass your home onto your children, then of course it would not be a good idea. Usually at this age in their life, I would hope the children are able to take care of themselves.

sandy
sandy
10 years ago

I went to a workshop on this topic a few months ago (I work with the elderly in the social services). What I gleaned from the program was, one should really be careful to examine all aspects of this kind of program, given the fees, taxes, etc…The woman who spoke with us, while a real estate agent, spoke about the integrity of the real estate agents who offer this to clients. They tend to not really care about the customer…it is a business transaction like anything else, and while commercials make it sound like a wonderful deal for older folks,… Read more »

Donna
Donna
6 years ago
Reply to  sandy

The part that you are forgetting is that you have to make payments on home equity loans. In retirement, a lot of folks are house rich and cash poor. It is a way for them to have a more comfortable retirement. You can’t take it with you when you leave this earth.

S
S
10 years ago

“wondering how difficult it is to take care of all the details after the homeowners pass away.” Our elderly neighbors had a reverse mortgage and it was a nightmare for their adult children to deal with – i.e. prepping the house for sale, dealing with the sale details, all long distance, at the same time as dealing with the funeral arrangements (both died within 6 months of each other). They were happy to make enough off the sale of the house to settle the debt, the cost of cleaning out the house ($800 for dumpter service alone), pay the real… Read more »

CB
CB
10 years ago

My wife’s grandparent’s friends are considering this. Her grandfather is a real estate agent and is helping with the process. I think, based on this article mostly, they aren’t the best idea but the reverse mortgage has it’s uses. It sounds like when the you die, the heirs can choose to let the mortgage company take over the home. So if you don’t have heirs or aren’t sentimental about them taking over the house, it could be a good option. I don’t like the idea just because you know you’ll have to pay it back somehow. Companies do not give… Read more »

Donna
Donna
6 years ago
Reply to  CB

The home is the payment. You do not have to pay anything beyond that.

bill
bill
10 years ago

Fees can run as much as 8% – 10% of the VALUE OF THE HOME (not 8% interest). Assuming folks own their home outright, they will be able to take out 50% – 70% of its current value.

This is a very profitable and no risk product to sell; its a loser all around for the homeowner.

Merry Christmas Everyone

Rick Francis
Rick Francis
10 years ago

My wife’s grandparents did a reverse mortgage- they got a lump sum payment but the money didn’t last very long. Once it was gone their financial problems were all back, some were worse than ever because of additional health care costs. If they had taken regular payments I think they would have been happier. The money certainly would have lasted much longer and would likely have been spent wiser too. A reverse mortgage has a place as a last resort, but I would never consider it if there are other alternatives… Losing 10% of your home’s value is just too… Read more »

elisabeth
elisabeth
10 years ago

I think this might be a good idea for someone who wants to stay in their house — and most people do want to “age in place” if they can — especially those with no desire to leave an estate (more and more people are childless or have children who don’t need an inheritance). The fact that “You also keep the title to the home and can never be forced to move as long as you pay the property taxes and insurance” might make a lot of people feel more secure, in a way that selling a house to get… Read more »

Tara
Tara
10 years ago

My co-worker’s mother did a reverse mortgage this year. She is someone that benefited from this type loan option. Her husband is deceased and she needed immediate funds to cover her healthcare expenses. Her children were not interested in inheriting her home, but could not help finiancially with her medical expenses. Their plan is to sell the home when she passes to pay off the reverse mortgage. For her situation, this allows her to have the healthcare she needs without having to give up her home today.

David/Yourfinances101
David/Yourfinances101
10 years ago

I think one should tread very carefully before jumping into a reverse mortgage. In the example outlined in the post, I think its a good idea, but I also know that some less than ethical people out there try to market these things to people to whom it would do nothing but harm.

Sheila
Sheila
10 years ago

My sons’ father is 62, lost his job last spring and took out a reverse mortgage this summer since he’s been unable to find a job. I thought the better option would have been for him to start social security, but maybe he did that, too. I was rather astounded that he’d consider a reverse mortgage at age 62. Elisabeth (@20), the premiums for LTC for my husband are $2100 a year. The cost of a nursing home or home care is more than $3000 a month right now. I don’t think saving up $2100 a year would pay for… Read more »

Tom
Tom
10 years ago

“I don’t like the idea just because you know you’ll have to pay it back somehow. Companies do not give money away for nothing so you know somehow they will make money. It seems sort of sneaky to me.”

Exactly. Considering how strongly the financial industry is pushing reverse mortgages – like they did with interest-only loans, ARMs, etc. (and look where that got us), I’d stay far far away.

Donna
Donna
6 years ago
Reply to  Tom

Of course it has to be paid back. The home is payment. The home is sold and the loan is paid back. Any remaining equity goes to the heirs. If the heirs want the home they can take out their own loan and buy it. If there is no equity left and the house isn’t worth what the loan payoff is. It does NOT matter. You cannot leave a debt to anyway. The house is the only payment.

Mike Hunt
Mike Hunt
10 years ago

Is there a version of the reverse mortgage loan where they use your home as collateral and keep paying you only to keep the home at the end of the annuity or if you die (whichever comes first)? That would seem like a better deal!

What if the originator of the product goes belly up?

-Mike

Donna
Donna
6 years ago
Reply to  Mike Hunt

Yes there is an option where they can give you monthly payments until you permanently leave the home. If the lender goes belly up as you put it, it does not matter because they are FHA insured so that you are guaranteed to get your payments.

Debtheaven
Debtheaven
10 years ago

Q: Is there a version of the reverse mortgage loan where they use your home as collateral and keep paying you only to keep the home at the end of the annuity or if you die (whichever comes first)? That would seem like a better deal! I am in Europe (France) and this is how it works here. It is usually until the person dies, but it can also be for a fixed number of years. What’s more, banks and other lending institutions have only just started to offer reverse mortgages. Until very recently, reverse mortgages were only negotiated between… Read more »

Suzanne
Suzanne
10 years ago

I may be thinking of a different product, but didn’t reverse mortgages become popular in the ’80s for AIDS patients who knew they didn’t have long to live but needed money quickly for treatments? I remember reading at that time that they were willing to pay the high fees because they were desperate and really had no other choice. It seems to me that the banks saw a great opportunity to expand the program to slightly less desperate people. @Sheila – nursing home care is far more than $3000 a month. You may be thinking of assisted living which currently… Read more »

Suzanne
Suzanne
10 years ago

Just googled the costs of a nursing home… Looks like its just over $6k on average but varies wildly by state.

Des
Des
10 years ago

Can someone explain this line to me:

“After the past year’s market performance, it’s worth noting that no matter what happens with the housing market, the amount owed on a reverse mortgage never exceeds its market value at the time a house is sold.”

I have read and re-read that and I do not understand what it is saying.

ken
ken
10 years ago

mike,
the originators debt is:
1. Insured
2. would be bought by another bank.

The lendee would not be in danger of losing home unless they fail to pay taxes, Ins etc..

Gina
Gina
10 years ago

My take is that reverse mortgages are a horrible idea. My parents and I are in agreement that under no circumstances will we be doing this with their home. It’s a financial option for people who failed to plan for their retirement adequately, and are now desperate to maintain a standard of living. The “financial experts” are also the ones that brought us to near financial ruin last year with all their shenanigans surrounding home mortgages. This is just another one of those vehicles designed to enrich the banks and enslave the homeowner with debt. The poster above has reverse… Read more »

Donna
Donna
6 years ago
Reply to  Gina

The house is the only payment for the house. You do not leave a debt with a reverse mortgage. The house is after all your parents home. I don’t know where the children get the idea that the home is theirs. I suppose you think that selling their home and getting the money for yourself is easier than selling the home and paying back the mortgage?

rxjohnk
rxjohnk
10 years ago

While I too believe that reverse mortgages are too expensive to be a good option for many homebuyers, it seems to me that many of the comments on this post are from children of people who would be a target for this product. Many of those comments, especially #31, come from what seems to me to be a very selfish standpoint, e.g. – “I do not want to be in a position of settling debt on a house they now own outright”. It seems like some of these “children” have already inherited the house in their minds! If the house… Read more »

E
E
10 years ago

I think a reverse mortgage is a good idea if a) you live in your house until you die b) you live a long time and c) you don’t want to leave the house to anyone. However if you have to move into nursing care or assisted living you could be seriously screwed. My grandmother sold her house at the peak of the market, and that money will pay for her care in assisted living for the rest of her life. Her brother did not sell and now he cannot sell, and if he should need nursing care he would… Read more »

Gina
Gina
10 years ago

This is for #32: You want me to absolve myself of responsibility to my parents? I’m the only person my parents have to take care of their issues. If I’m not the executor of their estate, it will be left up to the state to determine what happens to their bodies and possessions when they leave this earth. I am their only child. How dare you presume that my position is a selfish one — my parents worked hard all their lives, and have a modest but quite adequate retirement. They own their home outright. When it passes to me,… Read more »

Jim
Jim
10 years ago

Generally I don’t think reverse mortgages are a good idea except as an option of last resort. If you have no retirement savings and minimal retirement income but you have substantial equity in your home then it might be an OK idea. But thats about the ONLY situation that I’d do it. Generally downgrading your home or moving into an seniors apartment is likely a better option even for low income folks. If you do want to pursue a reverse mortgage then I’d definitely scrutinize them to look for one with decent fees and return as I’m sure there are… Read more »

Jason
Jason
10 years ago

This post from the Calulated Risk blog has a lot of detail about how they work. I think the conclusion is that they sometimes make sense, but could easily be used to take advantage of people, and therefore, should be heavily regulated.

http://www.calculatedriskblog.com/2007/05/reverse-mortgages-ubernerditorial.html

Cathy
Cathy
10 years ago

Oh geez. These are now being talked about as being a ‘sometimes’ good thing? I see where the next financial meltdown will be coming from. Everyone who gets one will think it makes sense for them, that they understand the risks, and they can manage the risks. Banks will push them because they get collateral and interest on a property that should have already been paid for. Duh. They are financial time bombs for the financially illiterate, just like ARMs. There’s going to be a lot of seniors with debt if this becomes the new bandwagon. There is no such… Read more »

Donna
Donna
6 years ago
Reply to  Cathy

You cannot pass on debt from a reverse mortgage. People please educate yourselves before spouting off on topics you know nothing about.

Dan
Dan
10 years ago

I have been in the mortgage business for over 25 years. I was excited about reverse mtgs as a concept but the more I know the less I can suggest this product to anyone and still sleep at night. There is a narrow band of people this is appropriate for. The rest are being gouged in fees both by the lender and the government. On a regular fha loan where the government insures a loan with an ltv of 97% the gov charges less than they do on a reverse with an ltv of about 65%. All the lenders use… Read more »

Gene
Gene
10 years ago

My mother took out a reverse mortgage after my father died to supplement social security and pay bills. Now she has died and there is no equity in the home. In addition, with house prices the way they are, it’s unlikely I will recoup any money if the house is put on the market. The end result? I’m walking away from the house and turning it over to the bank. If a parent wants to pass on equity to his or her children, don’t take out a reverse mortgage.

Donna
Donna
6 years ago
Reply to  Gene

Good for your Mom. Children of today have the entitlement mentality. Aren’t you happy that she had something to use to be able to pay her bills?

Chip Rohlke
Chip Rohlke
10 years ago

My mother had a reverse mortgage on the home I grew up in. Here’s what a total rip off they are. She got it in 1995 and they appraised the home at 80k. She got 90% of that as a reverse mortgage where they paid her $8k up front for closing costs then $180 a month for 13 years. The 1st year alone loan balance was over $11000 because they charged 13.5% interest!! In 13 years the whole equity in the home was used up! She just passed away last Dec. ’09 and now the crooks at Financial Freedom Acquisition… Read more »

peteraider
peteraider
10 years ago

why should parents/grandparents leave the children anything??Did they help pay the mtge.taxes,paint etc??To the ones that did, god bless.
Hey why can’t my wife and I,if we choose get some of that back,and enjoy the money.Most young people today still expect the parents to take care of them.It should be the other way around.Whatever is left they can have it.

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