Question: Should I get a Reverse Mortgage?
Short answer: You should consider all other options first before looking into a reverse mortgage. Reverse mortgages tend to have very high fees and complex structures that often leave the homeowner or their heirs with no equity when the house is transferred in the future.
Long Answer: A reverse mortgage is home loan that provides cash payments based on the amount of home equity in the home. This product allows a person 62 years or older the ability to take equity out on their home. The balance of the loan is due when the homeowner dies, sells the home or is unable to live in the house. The loan does not have an income requirement but is usually based on the equity in the home and the persons age.
With a conventional mortgage the homeowner will make payments towards the mortgage paying down principal and interest and building equity.
For example if you take $100,000 out in a reverse mortgage on your home the interest keeps accumulating. Later on you may sell your home and find that your new mortgage is higher than the value of the home leaving you with zero equity. It is important to note that the person taking a federally insured reverse mortgage or their estate will never owe more than the home is worth when the loan is repaid.
Why should you be cautious? Because often times reverse mortgages are being sold with complex set of rates and schedules, and it may be difficult to determine the true cost. Because of the high cost of reverse mortgages you should always consider all other options first. There has been a lot of complaints about the legal and ethical practices surrounding reverse mortgages and the pressure from sales personnel. Because of the target age demographic there is always a higher concern for fraud or undue pressure to upsell or deceive. Even though you stop paying your loan payments on the house the homeowner is still responsible for the taxes and insurance and needs to keep the house in good working order.
NOTE: If you are considering getting a reverse mortgage please consult the advice of a trusted adviser as this decision should not be taken lightly or made under pressure.
1. Federal Trade Commission – Reverse Mortgages
2. Office of Minnesota Attorney General – The Real Deal on Reverse Mortgages