Reverse Mortgages Are Not For Everyone

August 29, 2016

More frequently, reverse mortgages are being discussed as a way to solve your money problems.  They are a fantastic option, in the right situation, but not everyone is in that situation.

First of all, what is a reverse mortgage?  A reverse mortgage is a loan against the equity in your house that you do not have to repay until you die, sell your house, or move out of your house.  It is only available to people age 62 and older.  The loan must be the first mortgage on the house, so any prior mortgage is paid with the loan proceeds. 

How does a reverse mortgage differ from a line of credit?  A line of credit must be repaid within a stated period.  Additionally, the costs of a line of credit are often much less than a reverse mortgage.

The costs of a reverse mortgage include yearly fees, mortgage insurance, servicing fees, and interest charges.  AARP gives the following example:  Betty is 75 and owns a house worth $250,000 with no mortgage.  If she borrows $67,742 and then lives for 12 more years, she will owe the $67,742 plus the costs of $136,029 for a total of $203,771. 

Since Betty never has to pay the reverse mortgage, it sounds like a great deal.  But, if Betty has to move to receive care, she will have to sell the house to pay the debt (or pull the money from somewhere else).  She will not have much equity left to reinvest in another living arrangement or to use for her care. 

Consider using a reverse mortgage when too much of your income is going to pay the mortgage or when you are not concerned about leaving anything to your heirs.  More information about reverse mortgage can be found at http://www.aarp.org/money/credit-loans-debt/reverse_mortgages/.

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