For the right homeowner, one who is primarily seeking a way to effectively age in place, a reverse mortgage can be a very practical option.
Reverse mortgages are an option for homeowners who are 62 years of age or older and have accumulated a significant amount of equity in their homes. They enable borrowers to cancel their mortgage payments and can also be used to supplement retirement income.
But there is a drawback to reverse mortgage loans, and they are not suitable for everyone. Here are some warning signs that you might be better off finding a different financial solution given your circumstances.
4 times a Reverse Mortgages makes for a bad idea:
It may not be a good idea to get a reverse mortgage right away if you have any plans to move soon, whether it’s to be nearer to family or to a house that is better suited for seniors. If you have plans to move within the next few years, you might want to postpone getting a reverse mortgage as well because the loan becomes due and payable as soon as the borrower vacates the property or passes away.
The Reverse Mortgage for Home Purchase is a kind of reverse mortgage that enables a borrower to obtain a reverse mortgage and buy a new home in the same transaction. When the time comes to relocate, this could be an option to save on the closing costs for both the new reverse mortgage and the purchase.
You aren’t physically able to maintain your home.
One requirement of a government-insured reverse mortgage is property maintenance. Like with any Federal Housing Administration-insured mortgage, a reverse mortgage specifies the home must be maintained to FHA’s standards. If you have mobility challenges and are unable to maintain your home, it may be worth considering whether there is a better option.
However, it’s also crucial to remember that the borrower can use the proceeds of the reverse mortgage however they see fit, including for home upkeep.
Your spouse lives with you, but does not qualify for a reverse mortgage
HUD modified their regulations in 2014 so that you can still apply for a reverse mortgage in the name of the spouse who is older even if they are not 62 at the time.
If the younger spouse was a non-borrowing spouse when the loan was first taken out (which would not be the case with a spouse who married after the loan was already in place), the younger spouse is no longer required to leave the home at the time of the older spouse’s passing, provided that the younger spouse was still residing in the home and the title passed to the remaining spouse.
The younger spouse’s age will now be taken into account to determine the benefit; however, because they are no longer required to leave, borrowers with younger spouses will now receive less money.
Homeowners must keep in mind, however, that the non-borrowing spouse is not a party to the loan and does not have all of the rights of a borrower on the transaction, despite being protected from having to move in the event of the passing of the borrowing spouse.
In other words, the younger, non-borrowing spouse does not have access to the funds on the line of credit if there is still a $100,000 line of credit available when the older, borrowing spouse permanently vacates the home. The remaining spouse would not be able to access and use the funds because they were never borrowed, so they would not be owed to the lender.
In particular, if other benefits like pensions or retirement income from a spouse who has passed also end and they are unable to access reverse mortgage proceeds, borrowers who are certain that the surviving spouse will be unable to maintain the home and their living expenses without the benefit of the reverse mortgage proceeds may need to reconsider whether or not this is a good loan for them.
You’re getting pressure from a broker, or you’re being encouraged to invest your reverse mortgage proceeds
Never allow a broker or lender to try to sway your financial decision, and those with reverse mortgage brokering licenses aren’t allowed to sell other financial products like annuities. If someone is putting pressure on you in this way, that should be a warning sign for you to get another opinion and consult a reliable source for more details.
A reverse mortgage might be a good idea for you if none of these circumstances apply to you.
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What is the downside of getting a reverse mortgage?
The loss of home equity is one of reverse mortgages’ major drawbacks. You’ll make less money when you sell the property or have less borrowing power if you need a new loan because you’re not reducing the balance of your reverse mortgage. You’ll pay high upfront fees.
Why do people dislike reverse mortgages?
Because reverse mortgages are negatively amortized loans, which means that the loan balance increases over time, some people might not like them. This differs from a traditional mortgage, which has a decreasing loan balance as borrowers make monthly payments.
What does Suze Orman say about reverse mortgages?
There is no one size fits all solution. Although a reverse mortgage won’t be everyone’s best option, it shouldn’t be disregarded as a component of their overall retirement strategy.
Why Are reverse mortgages a bad idea Dave Ramsey?
Dave Ramsey has branded reverse mortgages a “scam. He argues that these loans risk destroying your savings and leaving you with debt instead of a savings account because the costs are so high. The mere fact that some debts are bad does not imply that all debts are bad.