We have a very mixed opinion about reverse mortgages. You spend most of your working years paying off your house, only to lose it again after you retire. It doesn’t seem like the smartest decision, but there are cases where it does make a lot of sense. Just be educated and beware of the pitfalls/risks.
A Reverse Mortgage, also called Home Equity Conversion Mortgage (HECM) are federally insured loans backed by the FHA. When researching mortgage companies, make sure they are FHA approved. That is your protection against the mortgage company going out of business.
A reverse mortgage doesn’t make sense if:
- You have either a low or high value home (<150k, or >950k)
- You still have a significant amount of your mortgage to pay off
- You want to leave your house to your heirs
- You have a short life expectancy (<10yrs) due to health or other reasons
A reverse mortgage may make sense if:
- You are a sole survivor. You never married or your spouse has passed away
- You have no surviving heirs & nobody to pass the house onto.
- You are willing to leave your heirs a smaller portion of the value of your home
- You understand you still have to pay property tax, insurance, upkeep, etc..
- You are over 62 years old
- You have sufficient equity in your house for a lender to approve you
- You need income in addition to social security/savings
If you meet these criteria, and don’t want to donate your house to the state/church/charity, then it may make sense for you to explore the reverse mortgage income stream. Be aware of the following risks though:
- If you are married and pass away after taking one of these mortgages, your surviving spouse may be kicked out of the house
- You need to keep current with all upkeep: Property tax, homeowners insurance, HOA dues, property upkeep.
- Most reverse mortgages require PMI (mortgage insurance)
- Insurance companies don’t want to inherit a tear-me-down and write strict upkeep language into their contracts. Make sure you subtract those costs from the monthly payout to make sure it makes financial sense.
- Your home must be your principal residence. Do not live anywhere else for more than 12 months, or the lender may be able to foreclose
There are also some stiff fees that are charged when setting up a reverse mortgage. Origination fees of 2% of the initial value, plus %1 percent of the remaining value, capped at $6000 for HECM loans. PMI origination fees vary from .5% to 2.5% of the home value. Then there are required appraisal fees and closing costs that can amount to more than $2000.
If you’re brave or curious enough to be reading this far into the article, there are still some remaining pitfalls. Let’s say your home has a high value, over the limit that would normally require a jumbo mortgage for instance. The reverse lender may only value your home at their “home value limit”, and will likely also have a “loan principal limit” that is a percentage of the home value limit, both of which are lower than the market value of your home. So your $750,000 home may only get you a reverse mortgage of $340,000. With that mortgage, you’ll see about $2100/month. In this instance, you could come out much better by selling the house and moving to a rental or smaller home.
A Reverse mortgage can be a good choice for some people, but for others it should only be considered as a last resort.