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Is a Reverse Mortgage a Good Idea? – What Say You!

February 17th, 2012
     

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When a Reverse Mortgage is a Good Idea

It’s funny when you hear someone with a definite opinion, one way or the other about reverse mortgages that is the same no matter who you’re talking about or what the circumstances are.

The choice of whether or not to get this loan isn’t universally a “good” or “bad” decision – there are a lot of different factors that need to be considered. But it just could be the right choice for you.

Get Breathing Room for your Budget

A reverse mortgage could be good idea if you’re “house rich but cash poor”—in other words, you own your home outright (or have paid off the bulk of your mortgage), but don’t have much cash-flow

If you have a significant amount of home equity, but not a whole lot of ready cash in your bank account, it could make sense to utilize your available resources by tapping into that equity.

For example, if your budget is strained by ongoing monthly expenses such as medication, food, or utility bills, getting a reverse mortgage can help cover your every-day costs of living and give you some breathing room in your budget, while allowing you to remain in your home.

In another scenario, you might still owe quite bit on your current mortgage and a reverse mortgage might only give you enough to pay off your existing loan. Some might ask why this would make sense if you can’t get any money out of the house, but for others, it could be a good idea to take out a reverse mortgage in a lump sum and pay off your mortgage once and for all and be able to breathe easier knowing there are no more monthly mortgage payments.

You would still be responsible to pay your taxes and insurance, but would it make sense for you if you could eliminate your monthly mortgage payment? Only you can decide that.

No-Income Requirement Alternative to HELOC

Many homeowners get to that point where they need to begin making repairs on their home. Suppose you want to make home repairs or alterations to make it more livable and realize that to do the work, it’s going to be necessary to take out a line of credit for certain expenses? Now suppose that you don’t qualify for a Home Equity Line of Credit (HELOC) because of income or credit requirements as many senior borrowers on fixed incomes are now finding.

With the reverse mortgage credit line option, you won’t need to worry about typical qualification requirements. And you don’t have to worry about whether or not things will get too tight in your budget sending monthly payments to the bank since there are no monthly mortgage payments on the loan.

Preserve Retirement Assets

You may also want to talk to your financial adviser about using a reverse mortgage as a viable financial tool. Many portfolios have seen extreme declines in value and people are hesitant to lock in losses by selling out of those investments at a low point and thus depleting retirement assets.

With the careful planning and advice of your financial expert, you may feel that the reverse mortgage gives you the opportunity to continue to live in your home without having to deplete your assets. Keep in mind that this is not financial advice and that only you and your trusted financial advisor can make this decision…but the reverse mortgage does give you another option to consider.

Improve Quality of Life

And then you don’t necessarily have to be struggling to make ends meet to consider a reverse mortgage either. You could take out a line of credit in case you encounter unexpected expenses, use it for Christmas gifts for your grandkids or for travel, or for whatever you choose.

You can use a little and keep your costs down with the HECM Saver line of credit to preserve equity for family and heirs or if you don’t have any children or heirs and don’t have a plan for your home for after you’ve passed, then a reverse mortgage could simply be used as a way to improve the quality of your life in your retirement years. It’s entirely up to you.

So while a reverse mortgage isn’t universally a “good” idea for everyone, there are plenty of situations and circumstances where getting one of these types of loan could have a positive impact on your life.

Now I realize you may be thinking “This is written by a guy who does Reverse Mortgages”. And I started by saying that I find it funny when someone has a definite stance before they know you or why you do or do not want the loan because there are circumstances which can make the reverse mortgage a terrible idea…

How a Reverse Mortgage can be a Bad Idea

#1 – If you plan to sell your home and relocate to another area in the near future

A reverse mortgage is a loan that is designed for borrowers who wish to remain in their homes and free up equity in their properties to eliminate their current mortgage payments, other debts, enhance retirement funds or to fund private healthcare matters, etc. If your ultimate goal is to relocate to another area to either be closer to family or to downsize to a smaller home, a Reverse Mortgage may not be the best option for you as the Reverse Mortgage balance will rise over time.

#2 – If your spouse is not yet 62

Reverse Mortgages require that all borrowers meet the minimum age requirement of 62 in order to go on the loan. If you are at least 62 years old but your spouse is not, the only way to do a Reverse Mortgage would be to do it in the elder individual’s name only. This could potentially create an issue later on as the loan becomes due and payable with the last borrower on the loan passes or no longer lives in the property. Because the eligibility is based on age, the older borrower will always get more money and therefore, a younger borrower would never be able to refinance for enough to pay off the older borrower’s loan, even if they attained the age of 62 by the time something happened to the older borrower. If you have a younger spouse that would not be able to get on the reverse mortgage with you, I recommend reading this post before going any further.

#3 – If you are on Government Sponsored programs such as Medicaid

Certain programs such as Medicaid have guidelines for individuals involved in the programs based on your income and available assets. Taking out a Reverse Mortgage loan and accessing large sums of cash from the homes equity may invalidate an individual’s ability to qualify for such programs. If you’re a recipient of needs-based programs such as Medicaid or SSI be sure to read this post.

#4 – If you still cannot afford the Taxes and Insurance, you need to consider other alternatives

You are still responsible to pay the property taxes and hazard insurance and maintain your home, even though you no longer have any monthly mortgage payments. If this is still a struggle and you cannot afford to live comfortably, even after you get a reverse mortgage, then you have to make some hard decisions and sooner is better than later.

A reverse mortgage will allow you to live for the rest of your life in your home as long as you can maintain it and pay the taxes and insurance. If you cannot, eventually you will default on the taxes and/or insurance which would also be a default on the reverse mortgage loan. If this is inevitable because you still cannot afford them, then even though no one wants to move out of the house they love, it may be time to make that tough decision before a default situation and you have even less equity to re-establish yourself elsewhere.

#5 – If your health is poor and you do not think you can remain living in the home

The terms of a reverse mortgage require you to live in the property as your primary residence. If you are already in poor health and are looking into possible long term care in the near future, a reverse mortgage may be the wrong choice for you as your loan wouldn’t allow you to be living outside the home for a period of more than 12 months.

So… what do you think about reverse mortgages?

Good or bad we’d really like to hear from you. Leave your comment below or chat with us online by clicking on that little red box to the left :)

Like this article? You may also find interest in our post on What is a Reverse Mortgage in Plain English” &  4 Reasons A Reverse Mortgage May Be a Bad Idea 

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13 Responses to “Is a Reverse Mortgage a Good Idea? – What Say You!”

  1. Kim says:

    My parents own their home and they put the house in my name many years ago. My father is older and his health is bad, my mother is younger (81) and her health is great. However, she can no longer care for him and it may be necessary to put him in long term care. Their combined SS can sustain them, with our help, but if he goes into long-term care, her SS cannot sustain her. Is a Reverse Mortgage right for her?

  2. Mike Branson says:

    The answer to this question is a definite “maybe”. I’m sorry, there is so much more to consider and I can’t comment without a full picture. For instance, are you telling me that all of you definitely will make certain that she has the support to continue on with the upkeep, maintenance taxes and insurance on the home? That with your support and the reverse mortgage, she can pay all her obligations and living expenses without a problem? Not paying these items is a default in the terms of the contract so if there is any doubt that you would be able to continue to help her meet all these obligations in a timely manner, the reverse mortgage may not be the right choice for her.

    Borrowers still have the same obligations regarding taxes, insurance maintenance and upkeep on the homes with a reverse mortgage as they would with any other loan. If the reverse mortgage frees up the homeowners’ so that they can easily meet these obligations and live comfortably in their home, this is what the loan is meant to do. If your mother would still be short the amount of cash to live month to month and the reverse mortgage was only delaying the inevitable move, that would not be a good usage of the loan. If a move must be made anyway, I would not advise homeowners to go to the expense of a reverse mortgage, accrue interest on the borrowed funds and then still have to move later only with less equity to use to find alternative living.

    If you are still uncertain and you do not have a good financial advisor to turn to, HUD counselors can help review budgets with seniors and their families to see if this is a viable option for them.

  3. Bernard Wolf says:

    My sister is having severe money problems and is $30 thousand into credit card debt. Her home that she owns by herself is probably worth about $145,000. She owes around $78,000 on it. She will turn 62 in a few months, is in good health and should live for another 25 plus years. She has just signed up to receive Social Security when she turns 62. An aggressive young salesperson has told her that she is perfect for a reverse mortgage. What do you say?

  4. Mike Branson says:

    Hi Bernard,

    It’s true that the reverse mortgage will probably eliminate the current mortgage on her home and allow her to live in the property for the rest of her life with no mortgage payment provided she continues to pay the taxes, insurance and upkeep on the home. At her age though, she won’t be getting any extra money from the loan so if this will allow her to manage her funds so that she can pay down or off her debt and live comfortably, then it might be a very good fit for her. If it only delays the inevitable of her having to sell her home due to money issues anyway and the delay just eats away at some of her equity with accrued interest and costs, then the reverse mortgage is not a good move for her. She should sit down with a credit counselor and see if the numbers are right.

    As I said, if this eliminates her issues and allows her the room to breathe, then that’s what the loan was meant to accomplish. If all it does is put her in worse shape if she still has to sell a short while later, there is no sense in eating up her equity only to have the same result, but leaving her with less cash later.

  5. evelyn courtney says:

    I have a question: I and my spouse are 70 years old. We wish to purchase a home and wonder if it would be possible to purchase a home with a reverse mortgage? We do not owe any money on the home we are living in and would not purchase the new home until this one is first sold.

  6. Mike Branson says:

    Good Afternoon Evelyn,

    Without knowing where you are located, I can only tell you “probably”. Here’s why. Texas still has not approved the reverse mortgage for purchases yet but you can in fact use a reverse mortgage to buy a house in all other states. If you live in Texas, they are in the process of approving the loan for purchases as well, but this has not been done yet so that would not be true for that state yet.

    The purchase reverse is a great tool for borrowers looking to buy a new home when they don’t want to, or can’t, pay for the new home all cash. It allows them to finance a portion of the purchase price without a monthly payment and as of this time, there is still no income or credit qualification criteria (although you do want to be sure you can afford the taxes, insurance, maintenance, any HOA dues and to live comfortably in the new home). The purchase program is not very difficult but does have some definite quirks of which you need to be aware and I invite you to check out our purchase reverse information here on our website or contact us and let us fill you in on any possible issues that you need to know before you make any offers!

  7. Lucy Carlson says:

    My Mom passed away recently and my Dad is living alone in their home in TN. He is barely making ends meet. He was forced into early retirement to help take care of my Mom. They owed about $120,000 on their mortgage (2nd mortgage) and the house is worth about $135,000. I didn’t know about the 2nd mortgage. Dad is 65 this year. Would a reverse mortgage be advised for him? Also, what happens if or when he passes away. My name is not on the house. It was only in Mom and Dad’s names.

  8. Mike Branson says:

    Hi Lucy

    If the home is worth $135,000 and he owes $120,000, he will not get enough from the reverse mortgage to pay off the current lien. He would have to come in with about $40,000 just to close the loan. If making ends meet is an issue for him now, I don’t think this would be a viable alternative for him at this time.

  9. Mike Branson says:

    Hi Lucy

    If the home is worth $135,000 and he owes $120,000, he will not get enough from the reverse mortgage to pay off the current lien. He would have to come in with about $40,000 just to close the loan. If making ends meet is an issue for him now, I don’t think this would be a viable alternative for him at this time.

  10. Calvin says:

    Hi,
    My mom is 70 years old. She only owes about 20,000 on her home, but she is barely making ends meet. Her house is with about 75,000. She’s in good health. Is a reverse mortgage. She is currently on Medicaid and is getting social security. She lives in Georgia

  11. Mike Branson says:

    Hi Calvin,

    Medicaid is a needs-based program. Before she started anything like a reverse mortgage she would want to speak with her financial counselors and the HUD-mandated counseling will help here as well. I am not a financial counselor so I cannot give her financial advice, but I would caution you to make sure that you do not do anything that would jeopardize her benefits. For example, you need to find out how her benefits are calculated but more are calculated on what assets she has in her bank account each month. Most borrowers who need some help, find that they can get a line of credit reverse mortgage, only take the money that they need early in the month making certain that they do not have excess funds in the bank by the end of the month. Your mom should consider taking the reverse mortgage counseling and having them review her circumstances and explain how it would affect her benefits. Please read more on “Reverse Mortgages and Medicaid Eligibility” on my post found here.

  12. Loretta says:

    So if you take out a reverse mortgage for let’s say $37k, and I pay back on the debt 8k. Why do I still owe $31K. How can I repay and be debt free in 10yrs. What is the formula to get out of this loan?

  13. Mike Branson says:

    Hi Loretta,

    Remember that you continue to accrue interest and mortgage insurance on the unpaid balance. Please feel free to contact our office and we will send you a calculator that we devised that will allow you to put in your information (amount owed, interest rate, etc) and however much payment you want to make and it will compute when your loan would be paid in full. It’s been a great tool for borrowers like yourself who have time frames in mind or know how much money they can afford to repay each month and wanted to figure the other variables.

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