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Reverse Mortgages: Pros and Cons

Posted Aug 23 2008 3:20pm

Nest Egg

Reverse mortgages understandably have their fair share of both advocates and critics. A financial tool to help seniors pay for home improvements, stay in their home, and increase their standard of living, the downside of reverse mortgages is that the cost can be high. I recently met with a family who asked me to help them talk with their aging parent about moving. The senior and her adult children shared with me their concerns about why they thought it was a good time for her to move. The mom, let’s call her Susan, recognized she needed some help with preparing meals and housekeeping, but really wanted to stay at home. The challenge was finding the money and the services to help Susan stay home for as long as possible, and in a way that would meet her daily needs and give her family some peace of mind, knowing that she would be safe. This gave us the opportunity to talk about reverse mortgages.

First, to be eligible, you must be over sixty-two years of age, own your home, and be living in it as your primary residence. The amount you are eligible for depends on your age, interest rates and the value of your home. Most reverse mortgages are set up so the home owner can receive monthly payments.

Advantages

  • The reverse mortgage can be set up as a monthly payment, line of credit or a lump sum, whatever works best for the senior.
  • No matter how the reverse mortgage is set up, the home owner does not make any monthly payments.
  • No monthly payment is due from the home owner unless he or she dies, moves or sells the home. At that time the loan is due in full, plus interest and fees.
  • The home owner can receive monthly income from a reverse mortgage as long as he or she lives in the home as a primary residence. A home owner could potentially continue to receive monthly payments even after the loan balance is higher than the amount that the house is worth.
  • Neither the home owner nor his or her heirs will ever owe more than the home is worth, no matter how many payments are received or how high the interest rates become.
  • It’s fairly easy to qualify for this loan since credit scores and income are not part of the qualification process.

Disadvantages

  • The closing costs are high. The senior must pay origination fees that are about double what they are for conventional mortgages and mortgage insurance. The interest rates are adjustable.
  • For seniors who depend on Medicaid or other state or federal programs, it’s important to consider if reverse mortgage payments will affect their eligibility.
  • The senior is required to attend counseling by an independent HUD counselor prior to receiving a reverse mortgage. These are complex loans and this is a measure of consumer protection.

Possible Alternatives

  • A line of equity may be an alternative. There are fewer fees, and the money is available on an as-needed basis, but it requires monthly payments.
  • Refinancing the home with a conventional mortgage may save mortgage insurance fees that a reverse mortgage would require. However, this too requires monthly payments.

As a potential consumer of any financial tool, be cautious and seek out accurate information before making a decision. If you are looking for information on reverse mortgages, I suggest you talk with a HUD counselor or someone impartial. Reverse mortgage officers may be prone to selling only the advantages since they get paid when you take out a reverse mortgage. Real estate agents may be prone to selling only the disadvantages of them, as they get paid when you sell your home. Your best bet is to find an impartial advisor such as a financial planner (whose brokerage doesn’t sell reverse mortgages), an elder law attorney or a certified reverse mortgage counselor, all of whom will be able to share practical information to help you make your decision.

Here are a few links of interest to help you get started:

Reverse Mortgage Calculator

Find a HUD Counselor

Find a HUD-Approved Reverse Mortgage Lender

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