Reverse mortgages sound great…at least according to the television commercials. But look at the details and you’ll find that there are some significant downsides to reverse mortgages. They aren’t for everyone, although they can be useful in some situations.
Two situations reverse mortgages may help
What are situations where reverse mortgages might make sense? Putting aside the cost of the reverse mortgage and the overlooked risks that are mentioned below, there are two particular situations where getting a reverse mortgage can be useful:
- You need to supplement income to allow yourself or your spouse to remain at home, perhaps with dementia or Alzheimer’s. However, keep in mind that this pool of money is finite, and you have to have a backup plan for how to pay for care…at home or in a care facility…before the money runs out.
- You don’t care about leaving the home to children as an inheritance, and you are in your seventies paying down a monthly mortgage. The reverse mortgage can give you extra monthly income by eliminating that monthly mortgage payment. Again, you have to be careful that you have reserves to continue paying for taxes and insurance or you could lose your home early.
Cautions about reverse mortgages
Reverse mortgages are more expensive to obtain than conventional mortgages. When you see ads about “no cost” reverse mortgages, investigate further: you are paying a lot for the reverse mortgage, but those costs are added to the loan itself and reduces money available to you. In fact closing costs for reverse mortgages can be double those for a conventional mortgages. For example, on a $200,000 home expect to pay close to $10,000 for closing costs. That includes the mortgage insurance premium payable up front and required by law, and the origination fee paid to the lender. Compare this to a typical home equity loan where you have to pay at least interest each month but closing costs are much lower.
Another overlooked problem is that even though you won’t have to start paying back the reverse mortgage loan during your lifetime, you could still lose your house to a tax foreclosure or be unable to stay in your home if you can’t pay property insurance premiums. Be sure you have income or reserves available to continue paying these expenses, or you won’t be able to keep your home and will have to move.
Reverse mortgages mean the home probably won’t be inherited by your children. Think of a reverse mortgage as selling your home in advance, but not having to move as long as you can continue to pay the taxes and insurance. The bank will require that the family either pay back or sell the house when the parent dies (or when the survivor of the couple dies). Much or all of the sales proceeds will go to the lender. This also happens if the elderly borrower (or both borrowers) are no longer living in the home, which makes the loan due and payable.
Lenders can’t come back against the estate or heirs to collect if the house doesn’t sell for enough to cover the loan plus the accrued interest over the years. That means the heirs could simply walk away from the reverse mortgage and let the bank foreclose the property.
A problem with a reverse mortgage if you are likely to need nursing home care is that in North Carolina the homeplace is an exempt assets. It can generally be protected from nursing home and Medicaid costs. However, if you have a reverse mortgage then the home is still not a countable asset. But if it is sold during the lifetime of the Medicaid recipient, or if it’s still owned by the Medicaid recipient at time of death, the home’s equity (if any) will be lost to Medicaid. You should talk with your elder law attorney about that if nursing home care appears likely for you or your spouse.
Get more information
Reverse mortgages are complicated. You should explore the different options available and shop around. Here are two web sites to start with:
- AARP has a number of articles, and a helpful closing costs calculator. Visit www.aarp.org and enter reverse mortgage into the search bar.
- The federal government’s site at hud.gov describes reverse mortgages and has tools to locate a lender. Note that reverse mortgages are referred to on this site by their more formal name, of “Home Equity Conversion Mortgages” or “HECM loans.” This has the latest regulations, and you can download consumer guides at this site.
