I’ve seen dozens of solicitations and information sheets that contain a full litany of situations in which reverse mortgages are suitable for potential borrowers. What I have yet to see, however, is a comparable list of situations in which reverse mortgages are definitely not appropriate. Here goes:
- Short-term Time Horizon: Due to high upfront costs (origination fees, insurance premium, etc.), a reverse mortgage is simply not economical over a short time horizon. In order for it to be worthwhile, you should plan on staying in your property for a minimum of 7 years. If your time horizon is shorter, you should consider an alternative source of financing.
- Strong Financial Position: If your financial position is currently strong, there’s no reason to obtain a reverse mortgage, since you will pay annual fees, interest, and insurance premiums for as long as the loan is outstanding. Instead, wait until your cash position deteriorates (ideally, this will never happen), and/or you have a legitimate financial need before contemplating a reverse mortgage.
- Young Age: If you are barely older than 62 (the age at which one becomes eligible for a reverse mortgage), you might want to consider waiting a few years before obtaining a reverse mortgage. I offer this suggestion not only because FHA loan maximums are correlated with age, but also because the longer your loan remains outstanding (the more interest it will accumulate). Therefore, by waiting, you can both obtain a larger loan and save money (on interest) over the life of the loan.
- Desire to Live Affluently: If your primary motivation for obtaining a reverse mortgage is to raise your standard of living, please reconsider. While trading home equity for a nice vacation, new car, and a few fancy meals might seem like a good idea, you will almost certainly regret your decision when the time comes that you have a genuine need for some extra money.
- Property Needs Repairs: If your property is in poor condition, you need to bear in mind that under the terms of the reverse mortgage, it is your responsibility to fix it. Failure to do so could lead to foreclosure. If only minor repairs are necessary, however, you can use the proceeds from an HECM reverse mortgage or better yet, a single-purpose reverse mortgage, to finance the repairs.
- Desire to Will Property to Heirs: If you have any desire to will your home to your heirs, a reverse mortgage is not appropriate, because when the loan comes due, the property will be sold. While your heirs still have the option of repaying the loan with cash at that time, a better choice would be for your heirs to purchase the home from you now or lend you money directly, so that there is no uncertainty when you pass away and/or the hypothetical reverse mortgage comes due.
- Poor Health: If your health is (excessively) poor, a reverse mortgage probably isn’t a good idea. Consider that even if you use the proceeds for legitimate medical expenses and your health worsens, you will be back where you started. Unless you need cash to pay for a one-time (i.e. not chronic) medical outlay, you should consider borrowing money from family members and/or selling your home.
- Lack of Savvy: Finally, if you don’t understand how a reverse mortgage works, do yourself a favor and take the steps to understand it, instead of diving right in. You might discover something that you don’t like that convinces you to reconsider. Then again, you might discover that in fact, it is suitable for you. The point is clear: educate yourself before making such a big decision.
One Response to “Reverse Mortgage No-Nos”
Have Feedback on This Article?
June 9th, 2010 at 12:21 pm
True No-No’s – Don’t Do It
1) Other refi options available
2) Where funds are truly not needed
3) Where house is a family heirloom or valued location where others in family will acquire, reverse sets up mortgage to satisfy
4) Family situations or dynamics, disfunctional relationships, where kids may be trying to get at funds
5) Where a trust has been put in place, may be mess to clear up or may disrupt the medicaid planning from Elder Law
6) Where costs of getting there doesn’t warrant the amount of cash possible, particularly in HECM refi’s
7) Using the wrong reverse program, forced by program to take all funds upfront, could put them in upside down situation within a very few years
8) Where plans are to invest funds in illogical ways, with investors waiting to capitalize, not good to accrue fixed interest on large sums in risky investments or with no chance of returns above the accrued interest. Ex. Annuities, investment folks with questionable credentials or someone you don’t know
9) Doing a reverse where one of the borrowers has a track record of burning through funds and will likely use it all quickly
10) Doing a reverse with a company who is not properly attuned to seniors, doing reverses just to turn dollars or with inexperienced loan officers. This could waste money they do not have in the first place.
11) Situations where there are truly other ways to rework the spending, save money, utilize programs unknown to the borrowers. Most seniors can find many cost savings or other forms of income. Have see many senors in a position where thay had funds in the wrong investments at 1% to 1.5% rates of interest, could earn 3-4 times the return properly handled.
A few examples I have actually seen in my 8 years in reverse, in which I have counseled borrowers against reverse and told them not to do it, with anyone. In some cases without professional assistance or Elder Law advice and counsel.