Reverse mortgages are not necessarily a rip-off, but like any significant financial transaction, it needs to make sense given the circumstances.
What is a Reverse Mortgage?
A reverse mortgage is a loan/mortgage that is taken out, but instead of getting all the money up front, the loan/mortgage is disbursed in monthly installments based on your financial needs. For instance, if your income can no longer cover all your expenses (because a spouse has died and you no longer have their income to use or you need to pay for in-home care), the monthly amount you can get from a reverse mortgage can be used to cover that shortfall. Also, unlike a conventional loan/mortgage, you are not required to repay the loan/mortgage until the house is sold or if you no longer live in the home. A reverse mortgage is in fact a "mortgage" so it becomes a lien against your home.
What are the advantages of a Reverse Mortgage?
As noted above, the main advantage of a reverse mortgage is that you get access to money that will allow you to remain living in your own home. Without access to a reverse mortgage, most people 62 years or older would not otherwise qualify for a conventional mortgage or home equity line of credit since they may not have the income to qualify. Obviously, if a person does qualify for conventional financing, that option should be considered first before considering a reverse mortgage. Another advantage is that the reverse mortgage does not need to be repaid until the home is sold or you move out of the home. Usually a 12-month absence from the home means that you no longer live there.
What are the disadvantages of a Reverse Mortgage?
The main disadvantage of a reverse mortgage is the expense. Not only will you pay all the closing costs and fees associated with the loan, but you will be required to pay a mortgage insurance premium that can be in excess of $5,000. I have seen total costs to close a reverse mortgage as high as $15,000. That's a lot of equity in your home that gets eaten up as soon as you sign the loan documents. And if you die or leave the home within the next several months, those costs are generally not recoverable.
Should you take out a Reverse Mortgage?
A reverse mortgage makes sense if you are in fairly good health and intend to remain living in your home long-term and need a supplemental “income” source to cover a portion of your living expenses. Of course, no one has a crystal ball to see what the future holds, but it makes no sense to take out a reverse mortgage as a “bridge-loan” to carry you a year or so until you move into an independent/assisted living arrangement or move in with a family member. If that is the case, there may be better, less costly ways to cover the gap. It also makes no sense to take out a reverse mortgage if it will only cover your expenses for a few years. A reverse mortgage needs to make sense long-term.
On the other hand, if you are certain you wish to remain living in your home and the amount you will receive from the monthly disbursements (combined with your other income) are projected to cover your expenses for the foreseeable future, then investing in a reverse mortgage may be the only way to accomplish your goals.
A Word of Advice
We live in a society that values independence and self-sufficiency, so the idea of selling our homes and moving into an assisted living or with a family member is difficult to accept. For many people, this may be a sign of weakness or failure. And that's unfortunate since as we age, it's only natural that we become less able and more in need of the help of others.
Some people are set in their ways and refuse to even engage in this type of discussion. But for those who have an open mind and are willing to consider the option of selling their home in favor of moving into a more social environment, it would behoove you to seriously consider your options while you are still able (physically and mentally) to make such a decision. You might even feel a sense of liberation, having the burden of home ownership lifted off your shoulders and forming meaningful relationships with others who live in close proximity. In many instances, the isolation of living alone in your own home feeds a general sense of loneliness and despair many older people feel which makes this transition that much more difficult.
The idea of selling your home and downsizing is a tough sell for some people, but an important discussion to have before investing in a reverse mortgage.