I received a number of letters and questions recently about reverse mortgages. One thing that is clear to me is that there is a lack of understanding of how reverse mortgages work. Because of that I thought I would go through some of the basics of reverse mortgages and what they should be used for. Used correctly, reverse mortgages can be a very good financial tool to use. On the other hand, a reverse mortgage used inappropriately can cause severe financial distress.
A reverse mortgage is a type of mortgage that allows you to tap into the equity of your home without having to sell your home. Unlike a home equity loan that requires you to make monthly payments once you’ve tapped into the loan, with a reverse mortgage, you never have to make payments. Whether you take the reverse mortgage in a lump sum or as an equity line to tap in on an as-need basis, you never have to make payments. The mortgage is only repaid when you sell your home or if you pass away while you’re still living in the home.
When you take the reverse mortgage, there is an interest rate and that continues to compound for as long as you own the home. If, for example, when you pass on, the mortgage amount and the accrued interest is actually greater than the house value, your family is not on the hook. The mortgage company assumes that responsibility. On the other hand, if upon your death, the house is worth substantially more than the mortgage balance, your heirs can choose to sell the house, pay off the mortgage and keep the difference. They have the option, not the mortgage company.
I believe reverse mortgages used correctly are an excellent financial tool. They allow someone to stay in their home and at the same time use some of their home equity to supplement their lifestyle. I typically don’t recommend reverse mortgages to take vacations, invest, support a child, or to pay for a grandchild’s college education. Not that these things are not important, as they are; however, I do not believe they are appropriate for reverse mortgages. On the other hand, I think reverse mortgages are excellent tools to be used to pay off the balance of a first mortgage or to use the proceeds to cover living expenses. Especially for people who are going to be in their homes long term, a reverse mortgage can provide the additional resources that would make the difference between a comfortable and not-so-comfortable retirement.
My advice: before you decide on a reverse mortgage, learn all you can. The more you lean, the better it will be for you. Lastly, always keep in mind that just because a company advertises on TV doesn’t necessarily mean they’re the best company you should use. Do your homework, check out some companies and don’t be afraid to interview them. One thing I can tell you for sure is if any company uses strong-arm tactics to get you to sign a reverse mortgage, that would be a sure sign to me that it’s a company you should not deal with.
One last note, I generally I don’t recommend reverse mortgages for people in their early 60’s. I think in most cases that is too young to get a reverse mortgage.