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If you’re a senior who’s feeling financially insecure, you may be considering a reverse mortgage. But please don’t.
Reverse mortgages sound like easy money. Instead of paying rent or mortgage, you get monthly payments for your house without having to sell it. Someone actually pays you to live in your own house.
But the truth about reverse mortgage loans – and, yes, they are loans – is much more complicated.
Use extreme caution when considering a reverse mortgage. It comes with a devastating downside: Losing your home and wiping out your nest egg.
5 Reasons to Say NO to a Reverse Mortgage
Reverse mortgages can seem like a Godsend. If you’re struggling to make ends meet in retirement, they offer regular reliable income. Reverse mortgage salesmen know that, and they can prey on your financial fears and insecurities.
They’ll tell you stories of people who happily got to stay in their homes… who had no more money troubles. They downplay the “loan” part of the deal. And here’s what they really won’t highlight: These loans turn into nightmares for thousands of families.
So even if – especially if – a reverse mortgage seems like a life preserver, here are five important reasons to avoid reverse mortgages:
- You can lose your home before you’re ready
- If you can’t afford to pay all home-related expenses on time, you can lose your home
- If you leave the house for an extended period – like if you need in-patient rehab for an injury or go on an extended vacation – you can lose your home
- They come with a lot of fees
- If you don’t follow the reverse mortgage rules to the letter, you can lose your home
And did I mention… you could lose your home.
If you’re still considering getting a reverse mortgage, make sure you know exactly what you’re signing up for – including your ongoing costs. The rules can be confusing. And you have to follow them to the letter… or you can lose your home.
Reverse mortgages offer huge rewards for lenders, so (not surprisingly) the industry is full of scams. Dishonest people purposely target financially vulnerable seniors and con them into taking out loans they can’t possibly meet the terms of. So if someone approaches you or your family about a reverse mortgage, run the other way.
How Reverse Mortgages Really Work
Reverse mortgages work sort of like home equity loans that you don’t have to pay back right away. Basically, you take a piece of your equity – the amount of your home that you own 100 percent free and clear – and trade it for regular monthly income payments or an up-front lump sum.
What’s My Home Equity?
How much equity do you have in your home? It’s the difference between how much your house is worth right now and how much you owe on your mortgage and other loans against your house (like a HELOC). You can find the approximate current market value of your home on websites like Zillow or Redfin.
But really, the reverse mortgage works sort of like an advance on eventually selling your house. Whenever you do finally sell the house, you pay off the loan plus a boatload of interest. The loan will also come due in full if you die or leave the house for a year… even if other people in your family still live there.
Unlike regular mortgage loans where your balance decreases with every payment, the amount you owe on reverse mortgages increases over time. It increases because of the interest that gets charged every single month – since you’re not paying it now, it gets added to your loan balance. Eventually, you’ll have to pay back every dime you got plus many years’ worth of interest.
All reverse mortgages have the same basic requirements:
- You have to be at least 62 years old.
- You have to own your home (or at least most of it) outright.
- You have to live in the home full-time.
- You can’t be delinquent on any federal outstanding debts like back taxes.
- You have to be able to make all ongoing charges related to the home – like property taxes, insurance, and HOA fees – on time every time.
The specifics of your reverse mortgage will depend on which kind you get, and there are 3 main types. Even though they have a lot of similarities, the 3 types have very different features. Make sure you fully understand everything about the reverse mortgage loan before you sign anything.
3 Kinds of Reverse Mortgages
There are three main types of reverse mortgage loans:
- HECMs: Home equity conversion mortgages – HECMs – are offered by the federal government. These federally-insured reverse mortgages let you use the loan proceeds for anything you want. Loan amounts are capped, so people with high-value homes may not be able to borrow their full equity. And before you can get an HECM, you must meet with a HUD-certified reverse mortgage counselor.
- Proprietary reverse mortgages: These loans come from private companies, so they’re not subject to federal guidelines or protections. There are no loan caps, so people with high-priced homes can get bigger loans with this type. In fact, they can loan you more than your equity – and that can leave you in a desperate financial situation if the loan were to suddenly come due.
- Single-use reverse mortgages: These loans do exactly what their name spells out: The lender – not you – gets to decide how the proceeds will be used. Often, these loans can be used only for home-related expenses, like paying property taxes or making home repairs. Many states and nonprofit organizations offer these loans to help struggling homeowners stay in their homes… but that can backfire.
Before you commit to any reverse mortgage, no matter which kind, please talk with an experienced HECM counselor. Even if you’re not getting an official HECM loan, talk to one of these advisors anyway. They will explain the benefits and drawbacks, compare the fees and costs of different loans, and make sure you understand all the terms and conditions of any loan you’re considering. You can find a list of qualified reverse mortgage counselors here.
Reverse Mortgages Come with $$$ Fees
No matter what kind of reverse mortgage you get, you will be paying a lot of fees.
Standard fees include:
- origination fees: the charge to create the loan
- closing costs: a bunch of fees you pay at closing, just like with a regular mortgage
- servicing fees: annual or monthly fees over the life of the loan
- mortgage insurance premiums: fees for insurance that protects the lender against losses
- interest: you get charged interest every month even though you don’t have to make any payments
Those are the basic fees you’ll find no matter where you get your reverse mortgage – and they can end up costing more than $100,000 over time.
Plus, private reverse mortgage lenders often charge more fees – even if they don’t actually call them “fees.” So make sure you read the loan agreement very carefully to avoid surprise hidden fees.
Know How You Can Lose Your House
If you’re thinking about getting a reverse mortgage, it’s probably to boost your monthly income. Then, ideally, after a few years you’d sell your house for a windfall and pay off the reverse mortgage with plenty of cash to spare.
Sounds good – but that’s not what usually happens.
Unfortunately, there are a lot of ways these loans can turn ugly. When that happens, you will lose your home… and probably a lot of money. So it’s crucial that you know ahead of time the main ways that you could be forced to leave your home because of the reverse mortgage.
You Can’t Afford the Upkeep
Reverse mortgage contracts are very strict about keeping up with all of your home-related payments. That includes:
- property taxes
- homeowner’s insurance (which you are required to have)
- HOA (homeowners association) fees
- basic home maintenance
Depending on the terms of your contract, missing even one of those payments or failing to keep up with the yard work can result in the lender calling in your loan. If you don’t have enough cash to pay back the full loan with interest, you’ll be forced to sell or go through foreclosure.
You Leave Your Home
Reverse mortgages come with another very strict rule: YOU, the named borrower, must be living in the home. If you don’t live there for more than one year the loan must be repaid right away.
That means if you take a 13-month world cruise… the loan comes due. If you need long-term rehab for a hip fracture… the loan comes due.
If you die and yours is the only name on the loan contract, the loan must be repaid immediately… even if your spouse still lives there.
When the loan has to be repaid, it almost always involves selling the house and handing over a huge chunk of the proceeds to the lender. Unless there’s another source of funds that can be used to pay the loan in full, your spouse… children… roommate… or anyone else living in the house will almost certainly have to move out.
You Can Change Your Mind About the Reverse Mortgage
If you’re having second thoughts about a reverse mortgage, you may be able to get out of it. After you sign that contract, you have at least three business days to change your mind.
If you do decide to not go through with the deal, notify the lender in writing – not email. Send the letter by certified mail with a return receipt, and keep that documentation in your records.
Once the lender receives it, they have to cancel all the loan documents. Then they have to return any money you’ve paid – including any fees and closing costs – within 20 days.
Look at Your Other Options
It may not feel like you have other options. But if you have enough home equity to qualify for a reverse mortgage, there are other things you can do to safely boost your financial security.
- Consider a traditional home equity loan or HELOC (home equity line of credit)
- Fine-tune your budget to trim or cut any expenses that don’t serve your quality of life
- Downsize your home and move to a place that’s easier to afford (and manage) with the resources you already have
- Sell your home to your children (or other trusted relatives) and then rent it back from them at a rate you can easily afford
You can find out more about your best financial options in retirement in my book Retirement 101. It covers everything from reverse mortgages to trends in senior co-housing to the best ways to minimize your tax bill in retirement. Get your copy of Retirement 101 here.