Reverse mortgages are for seniors 62 or over who need cash to supplement their income besides social security or other retirement income. By taking out the equity in your home with a reverse mortgage, you get a large upfront cash payment or installment payments that you don’t have to repay until you move out of the home, sell it or pass away. You are still responsible for taxes, insurance and maintenance and interest accrues on the mortgage until it is paid in full. However, a reverse mortgage may not be for you if you only need short term emergency liquidity. You might be better off with a home equity loan or line of credit because there are upfront costs associated with a reverse mortgage and other restrictions in your loan terms that you may not be aware of. Here are some areas you should investigate and think about carefully before you decide to obtain a reverse mortgage:
Children May Not Be Able to Inherit the Home. There may not be enough equity after you pass away for your children to inherit your home. When parents pass away, the children are left to sell the home and pay off the reverse mortgage. Depending on the amount of equity that was taken out by you at the time your loan was made and the amount your home is worth when your children go to sell it, the majority of the proceeds may end up going to your lender to pay off the loan balance and not to your children or grandchildren. You can take out an insurance policy, but you should consult with an insurance broker to find out how to structure the policy so there is enough to pay off your loan balance.
Limit on Obtaining Future Credit or Financing
If for some reason you decide to obtain a car loan or a personal loan, the fact that you have a large liability to the bank on your reverse home mortgage may prevent you from obtaining future credit or other loans. If you don’t have cash for to buy a car, you could end up in a position where you cannot afford a vehicle.
Adverse Effect on Your Medicaid Benefits
If you are planning on going on Medicaid and you have more than $2,000 in individual assets or $3,000 in married assets, you may not be eligible for the Medicaid program. You should with a Medicaid attorney or your accountant before obtaining a reverse mortgage if you are contemplating applying for Medicaid benefits.
Read all the fine print of the reverse mortgage terms carefully. There could be terms that require you pay the loan off in full if your home is vacant for a long period of time. Your lender could call in the loan and foreclosure if you violate the terms. You may be in the hospital or recuperating in a rehab facility to discover later that your lender started foreclosure proceedings against you. If you fail to pay your taxes, insurance or make needed and necessary repairs, your lender could cancel the loan and ask for the loan balance. Also, your home’s value could depreciate if you need to sell it, and you may end up upside down on your mortgage having to sell it via a short sale or even losing it to foreclosure.
Reverse mortgages are popular loan products among seniors today who find their social security benefits are not enough to live off of or who need a large sum of cash for other expenses and want to tap into their equity. They can receive the money in a lump sum or installments. Most seniors use the money for retirement expenses, medical bills, or other family expenses. However, you should be aware of the disadvantages and do some research first so you fully understand the consequences of taking out a reverse mortgage. The FHA HECM reverse mortgage requires all borrowers to talk to a HECM credit counselor first, which is good idea for all reverse mortgage borrowers. This way you can discuss your financial situation with a mortgage professional to determine if a reverse mortgage is right for you.