Seniors often look to a reverse mortgage for extra cash. But if you have savings, a family with whom you could live, or low-income assistance, a reverse mortgage should be your very last option.
Why? A reverse mortgage, also referred to as a "home equity conversion mortgage" (HECM), allows homeowners 62 years and older to convert their house into cash. But most don't realize a reverse mortgage may not be appropriate for their financial situation.
Seniors are required by the U.S. Department of Housing and Urban Development to take financial counseling classes if they want a reverse mortgage, says Mike Sullivan, chief education officer for Take Charge America. The agency, based in Phoenix, is one of many nonprofit credit and housing counselors contracted with the government for these sessions.
Reverse mortgages are "an expensive way to borrow money," Sullivan says. Fees can add up to 20 percent of the value of the home. "In exchange for $80,000 you've given away a $100,000 house," just as an example.
Borrowers still pay mortgage insurance, origination fees and closing costs. Read the fine print and understand the fees, he says.
Taxes and insurance: With a reverse mortgage, seniors borrow money against the equity of a home and are not required to make loan payments. But they still must pay property taxes and homeowners insurance, or risk foreclosure.
Home maintenance: Seniors are responsible for home maintenance, but cannot take out another home equity loan or second mortgage to cover repairs.
Loan repayment terms: The reverse mortgage comes due when the borrower sells the home, lives away from the home for 12 consecutive months, fails to pay property taxes or insurance, or dies. The principal, interest, and closing costs are repaid from the proceeds of the sale of the house. If the heirs elect not to sell, the money is paid from the estate. Reconsider if you plan to move in the near term. A reverse mortgage loan comes due if the home is no longer your primary residence.
Beware if you are eligible to receive low-income assistance from the federal or state government (such as Medicaid). Income from a reverse mortgage may disqualify you from that assistance. Visit the website AgingCare.com to find the asset limits for Medicaid. Social Security and Medicare are not affected if you get a reverse mortgage.