Should you get a reverse mortgage?
The question isn't easy to answer because these loans, which allow seniors to spend their home equity without selling their homes, involve both pluses and minuses.
On the plus side, this type of loan can help borrowers generate cash flow, pay expenses, set aside a nest egg or achieve financial and estate planning objectives. Those goals are all "legitimate, if done wisely," says Barbara Stucki, vice president of home equity initiatives at the National Council on Aging, a nonprofit advocacy and service organization for older Americans based in Washington, D.C.
On the minus side, these loans aren't appropriate for every borrower or situation. Nor are they the free money they might appear to be. In fact, the upfront fees, mortgage insurance costs and deferred interest on a reverse mortgage can add up to a sizable sum.
Here's what you need to know.
Don't borrow more than you need. Seniors may be tempted to take out a reverse mortgage for peace-of-mind purposes, but a lump sum in a bank account won't generate enough income to offset the loan's deferred interest expense, says Susanna Montezemolo, vice president of federal affairs at the Center for Responsible Lending in Washington, D.C.
"For the majority of people, it makes more sense to take out a minimum amount upfront, and then have access to a line of credit. They will owe less in interest over time," she says.
Don't be short-sighted. Seniors who won't be able to afford their property tax, homeowners insurance and home repair and maintenance expenses even with the extra money shouldn't use a reverse mortgage as a short-term solution.
"It's critically important that people don't just think about solving their problems today, but think about the long-term implications of taking out this type of loan," Stucki says.
One implication is that once the equity has been borrowed, it won't be available for future needs such as long-term care or medical expenses, Montezemolo warns. For that reason, it's probably not smart to use a reverse mortgage to remodel a kitchen or take a trip, for instance.
"There may be a day when, due to unforeseen circumstances, you really need that money, and it's not there for you," she says.
Another implication is that the equity likely won't be passed on to the next generation, because most reverse mortgages are paid off by the sale of the home.
"If the home was going to stay in the family, a reverse mortgage really prevents that, unless the children can pay it off down the line or the borrower comes into a lot of money and can pay it off," Montezemolo says.
Don't take out a loan during a crisis or major life event. Seniors should educate themselves and take advantage of reverse mortgage counseling before they need the money, so they won't have to make such a major financial decision during a medical emergency or immediately after the death of a spouse.