Don’t Let a Reverse Mortgage Turn Into Foreclosure
Imagine you’re in your eighties. You’ve taken out a reverse mortgage in order to stay in your home and use its equity for your living expenses. You do this for several years, but once these funds are depleted, the bank owns your home, and you also owe thousands in property taxes. You have no money or no job, and you’re about to be homeless.
It sounds like a nightmare, but it’s actually a reality for many retired American homeowners.
What’s a Reverse Mortgage?
Reverse mortgages are more for retired homeowners than anyone else. They are a perfect way to increase monthly income without also increasing monthly payments. Reverse mortgages can be an incredibly helpful financial tool for any retiree.
However, there are real downsides to reverse mortgages -- and it’s so important to weigh these before jumping into this loan product.
The Downside of Reverse Mortgages
First off, reverse mortgages are expensive. The upfront fees due at closing are some of the highest of any loan program. You would have to have some money saved up just to close the deal. On top of that, home maintenance is still your responsibility as the owner, and the same goes for insurance fees and property tax.
As you can see, a reverse mortgage won’t completely erase home-related payments -- and don’t let a lender fool you into thinking it will.
Another thing to consider is that while you still get to live in your home and own it, a reverse mortgage drains the equity you’ve built up over the years. Home equity loans and home equity lines of credit can be far superior methods of tapping into home equity, if that’s your goal. Sure, you would still have a second mortgage to pay, but you can choose payment methods that will eventually see your equity return.
With a reverse mortgage, it is more of a final decision; a loan that is only due to be paid back when you sell the home or pass away. Which leads to another downside: keeping the family home means your debt will pass on to the heir of your home. Mourning a loss and dealing with the financial repercussions of the passing of a loved one are extremely hard situations. To also inherit a sizeable debt attached to a family home could add to an already devastating scenario.
On the other hand, if you wind up having to relocate, paying back the reverse mortgage is now an additional burden to consider along with all of the other expenses you’ll incur from relocating.
Qualifying for a Reverse Mortgage
Besides the more obvious requirements of having substantial home equity and meeting the age requirement, the only thing borrowers must do in order to keep a reverse mortgage is live in the home as their primary residence. Reverse mortgages should really only be considered if the home you own is the last home you intend to live in -- and often, it’s impossible to know if that’ll be you or not.
There is also a mandatory counseling meeting that prospective reverse mortgage recipients must attend, which isn’t that big of a deal, but sometimes can be more valuable than money. Lastly, borrowers must be up to date with all federal debts just to qualify. There are many homeowners who have made it to retirement age who still have federal debts that have been left unattended, so if you’re determined to get a reverse mortgage, now’s the time to take care of those debts.
Reputable Lender or Scammer?
One of the most important things to do when planning on taking out a reverse mortgage is to find a reputable lender. There are far too many loan servicers that prey on retirees, making promises that they don’t keep -- or including deliberately confusing terminology in their loan agreements to get borrowers to sign without understanding what they’re committing to.
These are all things that any retiree should keep in mind while considering reverse mortgages. They are an amazing option for some, but they definitely aren't for everybody. It is best to always get multiple opinions from various financial and mortgage experts before committing to any loan program.