Reverse Mortgages Part Four: Should You Get One?

by Joe Plemon on March 17, 2010

Timbuk Tu 8840 Miles.

Investigate Every Option Before Deciding on a Reverse Mortgage

Creative Commons License photo credit: get directly down

Part one of this four part series explained the complexities of a reverse mortgage. Parts two and three gave the advantages and disadvantages respectively. And now, in part four, we arrive at the crux of the reverse mortgage issue: is it for you?

First, however, let’s review the definition and essential facts:

Definition

A reverse mortgage is the opposite of a traditional mortgage. With a traditional mortgage, the borrower builds equity in his house by paying down a loan taken against the house. With a reverse mortgage, the borrower gives up home equity in exchange for payments from the lender.

Essential facts

  • The home owner must be at least 62 years old to qualify for a reverse mortgage.
  • The home must have substantial equity.
  • Credit scores are irrelevant.
  • Any previous mortgage will be paid off by the reverse mortgage.
  • You can receive your payments by lump sum, monthly payments, line of credit or any combination.
  • The borrower retains the title on the house, meaning that he is responsible for all taxes, insurance and maintenance

Now: is a reverse mortgage for you? If you are seriously considering one, I assume the following:

  • You have a cash flow problem.
  • Staying in your own home is very important to you.
  • Leaving an inheritance is not important to you.
  • You clearly understand how a reverse mortgage works.
  • You have read parts one, two and three of this series.

Are you ready to pull the trigger? Slow down. The reverse mortgage may be a good choice for you, but because this is a decision that is nearly irreversible, make sure you clear the following hoops:

Make a budget.

You wouldn’t be considering a reverse mortgage if you didn’t have a cash flow problem, but it is possible that living on a written budget could solve that problem. Furthermore, if you aren’t great at managing money, the added income from the reverse mortgage could dissolve. Put the reverse mortgage on hold, work out a written budget and live on it for three months before considering the reverse mortgage again. Most people find money when they manage it. At best, you might resolve your cash flow problem without needing the reverse mortgage. At worst, you will be in a better position to manage the new income from your reverse mortgage.

Make sure you are not planning to move.

Once you sign up for the reverse mortgage loan, your home equity drops immediately because of closing costs. Because you are not repaying these closing costs, interest will be compounded against these charges as long as you are in the house. Moving normally is not a viable option once the reverse mortgage starts.

Consider waiting anyway.

The older you are when you start the reverse mortgage loan, the greater the percentage of your home equity you will be able to tap. If waiting is an option, strongly consider it. Signing up prematurely will cost you.

Examine other options.

I realize that staying in your home is important to you, but you should nevertheless compare the reverse mortgage loan to selling your home now and purchasing something smaller or more efficient. This option would utilize 100% of your current equity (compared with a 30%-60% in a reverse mortgage loan) and would leave you with 100% equity after you relocate.

Make sure you know:

  • How much cash you can get by selling your current house.
  • How much you would pay for a smaller home.
  • How much money you could earn on the nest egg that remains after you have downsized.
  • Another option: consider renting and living off the proceeds of the sale of your house.

Concluding thoughts

If you are considering a reverse mortgage, make sure you look before you leap. Why? Because the equity you are giving up makes the decision fundamentally irreversible. It is a BIG decision.

Therefore, be sure to check all alternatives first. Living on a budget, for example, might give you the cash flow you are looking for. Even if living out your life in your current home is a high priority to you, go ahead and run some numbers to learn how much you could reasonably net if you sell and repurchase a smaller home. The possibility of owning a smaller home and having $50,000 or $100,000 cash in the bank might influence your decision.

A reverse mortgage may be your best option, but only after you have ruled out every alternative.

I hope these thoughts help you with your decision. If you have further questions, please enter them in the comment box below and I will do my best to get you some answers.

Learn More About Reverse Mortgages – these links will help:

Have you or any of your family members had a reverse mortgage?  Did you understand it?   Any surprises?  Would you recommend it to others?

This post was included in the following Carnivals:

Baby Boomers Blog Carnival hosted by Baby Boomers US

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{ 11 comments… read them below or add one }

Ken March 18, 2010 at 2:43 pm

Great post with a lot of things for someone to think about. I’m with you. Someone should avoid this if they can find another way to support themselves.

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joeplemon March 18, 2010 at 5:12 pm

Thanks Ken,
I stopped just short of saying “Don’t ever do this” and softened my message to “Try every possible alternative first.”

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Linda September 10, 2012 at 6:31 pm

I fully understand the pros and cons of a reverse mortgage. Here are my circumstances:
1. I am 63 – 64 in November.
2. I get social security and two small pensions.
3. No heirs.
4. No health insurance.
5. Won’t be debt free for 2 more years.
6. House paid for.
7. House built in 1951, needs repairs for which I have no money. For instance, my roof is 20 years old but doesn’t leak and is in good condition, however, my insurance company notified me that because of the age of the roof they will pro-rate any loss – which means very little proceeds would be paid.
8. I would use the money from the reverse mortgage for needed repairs plus set aside money for future property taxes and my burial.
9. My lender Genworth will contribute $3700 to the closing costs.
10. Genworth said the amount of my loan will never exceed the value of my house because the shortfall is insured by FHA.

What do you think? Should I get a reverse mortgage or just hope the roof holds out until I’m debt free? Why should I leave this house to my heirs when I can get something out of it now?

Thanks for your help.
Linda

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Joe Plemon September 12, 2012 at 3:28 pm

Linda,
Because you say you fully understand the pros and cons of a reverse mortgage, I am assuming that you have also considered all of the alternatives I suggest, including selling the house and downsizing. At least with that option you get 100% of the equity. Also, you might be too worried about your roof, being as it doesn’t leak now. Could you afford to fix/replace it once you get debt free in two years?

I hesitate to recommend a reverse mortgage because it is so “permanent” and reduces your future options (such as selling and relocating). But personal finance is called personal because what is right for one person isn’t always what is right for another. If you weigh all of the factors and decided it is for you, go for it.

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Linda September 12, 2012 at 5:42 pm

Thanks for answering Joe. Since I posted that comment I have thought about this and considered that I was worrying about the roof too much. I decided I should just wait until I’m debt free and then get it replaced. There’s no need to downsize because I already have a small house. LOL. I have been very uneasy about this reverse mortgage but since deciding that I’m not going to do it I feel much better. Thanks for confirming my unwarranted worry about the roof.

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Joe Plemon September 13, 2012 at 6:53 am

Linda — It sounds like you had pretty much sorted this out on your own, but I am glad that my thoughts confirmed what you had been thinking. On another note (and pardon me if I am being nosy), but as young as you are, couldn’t you find some work to help you though tight times? I can say young, because I am older than you. :)

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Linda September 13, 2012 at 10:24 am

I do look for work Joe, but jobs are few and far between in the area where I live. The unemployment rate in my town is 11.7% with negative job growth. The next town is 30 miles away, so with the price of gas and wear and tear on my vehicle a job would have to pay well enough to offset that. Also, it’s difficult to even get an interview at my age. I must admit I’m not highly motivated but I am looking for something I might enjoy. After working 45 years doing jobs I didn’t like I want to treat myself to something enjoyable.

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Joe Plemon September 13, 2012 at 1:39 pm

I am all for finding something enjoyable, even if it pays very little. You never know — something bigger could come from it. Anyway, wishing you well at finding something you love to do.

peter April 2, 2013 at 2:56 pm

Is a reverse mortgage right for my parents? The circumstances for them–
Father is 74, Mother is 70. Father has poor health–says ‘he won’t be around much longer”. Mother’s health is declining.
Home is located in area of the country hard hit by the recession–likelihood that they could sell their home for even 80% of its value in less than 5 yrs is probably 1 in 50.
Home has strong emotional attachments for them–built by father and 2 sons–one of which is deceased. Father will NEVER sell.
Remaining son lives 500 mi away and is the named executor of the will.
Their income is very limited–SS and SSI plus small pension– ~ $2K/month.
If they get a reverse mortgage for 80% value (roughly $200K) and take a lump sum… if one passes, the other lives there until death–ok fine. But what if put up for sell and can’t sell it?
My thought is remaining spouse can walk-away and let the bank have the house for the discounted 80% price they paid. Or if surviving spouse lives there till the end, the estate won’t need to worry about selling and can walk away. There is no estate residual other than personal property and a couple of old vehicles.

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Joe Plemon April 8, 2013 at 11:23 am

Peter,

Because your parents will NEVER sell, and because they could use a bit of extra money, a reverse mortgage may be the best plan for them. Understand, however, that if your father passes away first, your mother will be basically stuck in the same house for the rest of her life. Why? Because the reverse mortgage sucked up whatever equity (and choices) she may have had. Be sure your parents understand exactly what they are doing and why. Get the figures and study those figures. You (and they) will probably be shocked at how little that lump sum will be.

Check back in to let us know how it went.

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judy November 6, 2013 at 5:06 pm

i have been considering a reverse mortgage for about the past 10 months. for reasons you touched on, i have not been able to let myself go forward with it. i am recently retired, age 64, own the home outright, no debt, live on a pension which is a net income of $3630 a month, health insurance is included, i have $35,000 in a savings account and $35,000 in a deferred comp thrift plan. Unless i go through my savings (which i have started doing, it was at $39,000 a couple of months ago), i am not able to afford the larger house repairs on my monthly income. The house is in good shape, 1956, well cared for, but it needs things repaired. The house is worth about $550,000 in the current market. I am convinced that i need to get a line of credit to manage these repairs and not let things go so that costs of repairs go even higher and home value goes down because of unattended to wear and tear. One other consideration is that i plan to sell the house and move to be near my daughter and her family but am not sure when. I expect to be clearer about this in the next 6 months or so. right now, I am guessing one to three years. I am trying to decide between a reverse mortgage line of credit and a HELOC. I understand that the HELOC has almost no fees, has an interest only draw period and then a repayment term. i’ve been studying reverse mortgages for months and have been to the government required counseling session, so i’m not completely naive about it, but i don’t have much understanding or aptitude for financial things, and i want to be as clear as possible which is the better choice. I don’t plan to use more than $30,000 of the credit line before i sell, in either case. When i sell the house, i will have to buy another one in my new city, a less expensive home, and i’m hoping i will have some money left over from sale of the first home when i buy the second one. I am very reluctant to take on the upfront costs of the reverse mortgage. With all fees included, the lowest quote i have so far is $5776, with a 3.0 margin, which is the highest interest rate of any HECM loan i’m looking at. There is one that i’m considering which is $8020 in total upfront costs with a 2.25 rate. But, that is still a lot of debt–even if i don’t use the credit line, which i will–it would be a balance of $6000 to $8000 accruing interest. This is the price to pay for the benefits of the reverse mortgage, which would be, i guess, having no monthly payments unless you want to pay, and having a large growing credit line, in case you need it. But if i sell my house and move, whichever kind of loan i get, i will sell my house and pay off the loan in one to three years. What i’m not very clear about is, what are the pros and cons? In what way is the HECM better in a situation like mine and in what way is the HELOC better? It seems obvious that the HELOC would be better, but when i google this, i can’t really find any answer that clears up for me what the downside of the HELCO would be compared to the HECM–are there things i don’t know about that would go wrong, costs? On the HECM, it’s the opposite. i see what the downsides are, the high upfront cost and the way that over time interest is added to the balance and eats up the home equity. I am wondering if there is a level at which the upfront costs would be low enough to make it a reasonable price for the benefits and if i am not going use very much of the credit line and will sell the house and pay it off in the fairly near future, does this reduce the risk of using up the equity on interest? I don’t want to get debt on my house at all so i am plagued by anxiety about making a decision about how to take on the debt in the least costly way.

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