Getting a reverse mortgage is to slowly but surely becoming a viable option for more of the elderly with each passing year. But is it the right thing to do? This is just one man?s opinion, but I think not, at least not in most cases. Most reverse mortgages are being taken for the purpose of holding on to a house that the occupant can no longer afford to keep. And even if you are borrowing out money for medical reasons or some other purpose, a reverse mortgage can leave you in a greatly weakened financial state, particularly in the long run.
But before we get into the downside of reverse mortgages, let?s first take a look at what they?re all about.
How reverse mortgages work
Generally speaking, reverse mortgages involve the lender making monthly payments to you – hence the term reverse. You take a loan based on the value of the house, and the lender makes payments to you, much like an annuity or pension, except that the payments are funded out of the mortgage on your house.
Actually, a reverse mortgage doesn?t always involve the lender making monthly payments to the borrower. There are three ways the lender can make the loan principal available to you:
- Through scheduled monthly payments, as discussed
- By giving you a credit line to tap the loan, or
- In a one time lump sum
In order to qualify for a reverse mortgage, you have to be at least 62 years old, and occupy the house as your primary residence. You must also own your home free and clear, or have a very small loan balance on it. Because you won?t be making monthly payments on the mortgage, you don?t need to qualify based on income or credit the way you do for a traditional mortgage.
The mortgage becomes due upon either the borrowers death, or when the borrower moves out of the property. In either case you must either pay off the mortgage or refinance it with a traditional mortgage in order to keep the house. If those efforts are not successful, the lender can seize the property and sell it to payoff the mortgage.
Generally speaking,?if the house sells for less than the amount of the outstanding mortgage balance, the borrower or the estate is not required to pay the shortfall. In the real world however, that?s not how it always works. In fact there is no shortage of horror stories taking place at the end of a reverse mortgage.
That being said, let?s talk about a better, cleaner way for retirees to raise cash or income.
If you need that much money it?s almost certainly time to sell
When a retiree, particularly in older one, begins considering a reverse mortgage, it?s likely that financial options are in short supply. After all, the only reason that someone would borrow money in order to pay for living expenses, home repairs or medical costs is because the bank accounts is just about empty.
I like to suggest something radical? when your finances reach that point, it?s time to seriously consider selling your home. If you?re 75 or 80 years old, and you have no other source of capital other than the equity in your house, it is unlikely that situation will improve in the future, and you need to consider a more permanent one.
The best way to deal with a capital shortage at that age is to simply sell the home. I realize that for many people, particularly the elderly, selling a home is an emotional obstacle of major proportions, particularly if you have been in the house for a very long time. But there are several substantial advantages to?selling your house outright, rather than taking a reverse mortgage:
- The house is probably slowly draining you though maintenance, repairs, and rising real estate taxes; selling the house will make those problems go away permanently.
- Selling the house will provide you with more capital than a reverse mortgage will, since it will give you access to 100% of the equity in the home, while the reverse mortgage will only give you a percentage of the property value.
- Unlike a reverse mortgage, selling a house will eliminate the entanglements and contingencies that come with having a loan on your house.
- A reverse mortgage could leave your heirs with the difficult task of having to deal with the lender, and with very few options on how to do that.
- If you take a reverse mortgage, and run out of money few years later, you?ll be facing the possibility of being foreclosed out of your property.
Using the house as an ATM got a lot of homeowners into trouble
By now virtually everyone knows that the housing/mortgage meltdown a few years ago was made significantly worse by the fact that people took equity out of their homes up to the maximum level they were allowed. As the property increased in value, they took more?cash out through either a home equity line of credit, or by recasting a new first mortgage. When property values began to fall in 2007, millions of homeowners?were “underwater” on their mortgages ??owing more on the house than the house was worth.
This started?the flood of foreclosures and strategic defaults, that spun into a full-blown financial crisis. A reverse mortgage follows the exact same process of equity stripping. The mortgage plays on the emotions of the elderly,?who are?fearful of losing their homes for lack of money. But if they strip out all their equity,?losing the house becomes a definate possibility.
What will you do when the equity is all gone?
Ultimately, the reverse mortgage is a short-term solution to what may be a permanent problem. If you?re taking the loan because you no longer have sufficient income to cover living expenses, it will just be a question of time before the reverse mortgage proceeds will be used up, and you?ll be back in the situation of having insufficient financial resources to pay your bills.
This is especially true since so many people are living well into their 80s and even 90s. Let?s say that at age 75 you take a reverse mortgage that includes a lump sum of the entire loan amount, and?five years later the cash is all gone.?You’re then?80 years old, and looking and feeling like you?re?going to?live another 10 years ? but now what???
Your cash is all gone, and so?is your equity. If property values in your area have declined?since taking the loan, you may not even be able to sell the house for enough money to payoff the mortgage.
The same can happen at the end of the term of monthly payments made to you by the lender. Let?s say that your reverse mortgage included a 10 year payment schedule beginning at age 70. What happens at 80 when no more money is coming in on the loan? You?ll be in the same situation you would be if you had?taked the?lump sum ? out of cash and out of equity.
A reverse mortgage will be nothing more than a temporary solution ? which is exactly what all loans are. Selling the house outright would be the permanent solution, and one that may even enable you to lower your living expenses.
Leaving your heirs in a tight spot
If you don?t expect to have any heirs, this won’t be a concern. Buy if you do, a reverse mortgage could leave your heirs in a quagmire upon your death. Although there are safeguards set up to prevent the worst from happening ? at least in theory ? many heirs face incredible complications when the owner of the property securing a reverse mortgage dies.
At a minimum, a reverse mortgage will leave less equity in the home, which will?mean fewer options upon the sale of the property. It will also create entanglements that won?t exist?if the property?is owned free and clear.?And there can?always be legal challenges ? a reverse mortgage lender can always cite some sort of legal technicality buried in the gobbledygook of the loan documents that will enable?the lender to?bring some sort of suit against your heirs.
If you need money, you?re far better off to sell your house, take maximum cash, and get on with a much simpler life. The reverse mortgage is not a wise choice for the vast majority of homeowners, particularly the elderly.
What are your thoughts on reverse mortgages? Have you ever had experience with one?
I totally agree with your assessment of reverse mortgages. Even though selling the home is the best thing to do, the reverse mortgage preys on an elderly person’s fear of leaving the home they have grown accustomed to.
Another bad “heir” situation is when one spouse is quite a few years younger than the other. They get a reverse mortgage based on the older spouse’s age, then a few years later, the older spouse dies leaving the surviving spouse in a pickle because, as I understand it, they are forced to move or pay off the loan in order to keep the house.
I agree completely Norman. Reverse mortgages add too many complications to the mix. Owning a house free and clear is the simiplest form of onwership especially when you’re a senior. Adding a mortgage of any sort, especially a reverse mortgage, blows that out of the water.
I haven’t researched the younger spouse issue, but it makes sense, and could leave the surviving younger spouse with few options – none of them attractive.
I think the simple answer is to sell the house but that leads to other questions. Aging in place is the way most seniors want to spend their golden years. Moving is a real hassle so staying in their home is the best option and that is where reverse mortgages come into the picture. They provide a great tool to increase cash flow and, with a lie of credit, provide some security in case an emergency need for cash arises. There have been changes to the program that discourage pulling out all of the equity so I tend to disagree with your analysis.
I disagree with your disagreement! 😉 Seriously though, I don’t think it’s usually the best option. In a time when property values can fall as well as rise, a reverse mortgage can be a dangerous “tool” – one can that can leave an elderly person worse than broke. I’m not even sure that enabling the elderly to stay in their homes is the right strategy, generally speaking.
A friend of mine spent years with his elderly mom hanging on to her house (one example of many I’m familiar with) and he told me that he had found out from counselors that most of the elderly stay in their homes ten years longer than they should. He finally did get her to move, but she spent a lot of time alone in the house when she really needed to be in a facility with people to look after her.
We had a similar problem with my mom until last fall. She kept hanging on to her house and living there alone, unable to keep it up herself. The house was declining in value because it was becoming more antiquated every year. It ultimately sold for a lot less than the surrounding market, but she’s happy as a clam living in a senior citizens apartment complex where there are plenty of people to look in on her and help at the margins. She’s more independent in the complex than she ever was in her own house, and now realizes that she held on too long.
My experience is one of Countrywide Hustle. My house was old and I was out of money so I wanted to sell it and leave. In came the broker. By the time I believed I could fix it and stay in it and have an investment for the future, I was convinced I was the owner. It was always that message which is false. You are a Seller. I took some equity to fix the house and found out I had a higher interest rate because of another document from Fannie Mae that was hidden at closing. Also, I was told I had paid my mortgage insurance and then a year later, I was paying it again. Lies and manipulation caused a huge loss and had I simply sold, I would be fine. Now I will have no home. I have no place to go even tho I have equity. Property Taxes in NJ are so high, I have to go. I am 72 and face advanced osteoporosis. I have to sell things and euathanize my pets and move away. This will be the saddest time of my life and had I just sold the house and moved in 2008 across the river to PA to a rental my future would be very different. Shut the door on anyone coming to your home telling you they will save your house.
Hi Barb – I’m very sorry to hear your story, especially knowing that it isn’t at all unusual. Typically, if you are in a situation of needing to “save your house (usually said as “home” since it has greater emotional appeal)” it’s already too late. Unless the factors that caused your circumstance are first corrected, you’ll still lose the house no matter how big the band-aid is that’s put on it.
We also have to remember that these would-be home-saviors make money selling “solutions” to the desperate. That means that they aren’t as harmless as they seem.
I agree with you – if you come to a point where you can no longer afford your house, or any other possession, it’s time to let go and sell it. As I’ve written many times on this site and on others, our lives are much more than our possessions. A house isn’t a virtue the way it’s popularly portrayed – it’s a possession, and there will be times in your life when you’d be better not owning it. At 72 the list of reasons to sell a house and move to less expensive quarters is extensive. Unfortunately, our culture has done a splendid job of emotionalizing a house, which can cause people to ignore or abandon reason at a time when they need it most.
BTW, I know what you mean about property taxes in NJ. My mom’s house in NJ had an annual tax bill of nearly $12,000 when she sold it last year. And no, she doesn’t regret selling it! At her age the house had become an albatross. For what it’s worth, she had been approached about doing a reverse mortgage on the house several times. Fortunately she asked me and my sisters about it each time, and we shot down the idea.
My mother got a reverse mortgage (her idea) with a line of credit about 8 to 10 years ago, (that I was initially opposed to). Because of my involvement, and my initial objection to the high closing fees, she went into it with her eyes wide open. (Btw, the lender margin is negotiable.) It has turned out to be a huge success for her to remain in her home – even with the significant upfront closing expense. She is now nearly 87.
Her property was valued at $450,000 when she got into the reverse mortgage -and it is now worth $1,250,000! Remaining in the property has allowed her to utuilize the leverage to make it a great investment instead of selling when it was worth $450,000. I believe her reverse mortgage balance is around $320,000 to $340,000 +/-, currently. Not having to make payments helps her to be proudly independent and allows her to not to have to ask for money from her children.
She uses the line of credit sparingly, but has used a significant portion to remodel the kitchen and 2 bathrooms, add a new roof, landscaping, and paint. My sister lives with her and contributes an agreed to amount as rent for living there which also helps my mother remain cash flow independent along with her very modest retirement income. The house remains in extremely good condition and my mother is very happy.
Seems to me that the reverse mortgage nay-sayers need to take a look at what is best for their senior parent – not themselves. In my case, my mother’s heirs will greatly benefit from the reverse mortgage as there will be $800,000 to $900,000 of equity that would not exist if she had sold her house to survive as is often recommended. After my mother dies, my sister will have to move – or we may refinance out of the reverse mortgage to allow my sister to stay. In any case, we’ll all be better off.
Not to discredit your story RC, but your mom’s situation is “working out” because of the surge in property values in the past 8 – 10 years – Not because the reverse mortgage is such a great deal. If the value had stayed at $450k, she’d simply be equity stripping it. But since the property value has nearly tripled in less than a decade, her story has a happy ending. At least so far. The real story is the huge rise in her property value, not the reverse mortgage.
And the truth is, most real estate markets in the U.S. are not sharing in this huge surge in property values. That?s limited to a few metropolitan hotspots.
Very few homeowners benefit from huge increases in property values that offset their carrying costs and investments in the home over the time they own it.
Thanks, Kevin. You have confirmed my reservations about reverse mortgages.