Published in Kailua Beach Neighbors, December 2017 by Cindy Siok, Principal Broker with At Home Hawaii
During a recent visit to a hair salon, a stylist shared with me that her Mom has gotten a reverse mortgage, taking a large lump sum that she is using to remodel the house and for living expenses, and while this is obviously possible, is it a good idea?
Reverse mortgages are marketed as a solution to seniors in need of money or as a way to more fully enjoy retirement. However, these loan products are expensive, complicated and hard to understand. The fees and accumulating interest can take a substantial portion of a homeowner’s equity in their house and for many older adults there are other solutions to consider.
If you are interested in a reverse mortgage, there are important details you should fully understand.
1. If you want to leave your home to someone, a reverse mortgage may make it impossible.
When you pass away with a reverse mortgage in your name, the loan becomes due in full upon your death. To pay off the loan, the bank can become the owner of your home by foreclosing on it. Then the bank can sell your home to get back the reverse mortgage money loaned to you. If the home sells for more than your outstanding loan balance at the time of your passing, the difference will go to your heirs. If it sells for less, your heirs get nothing, and your mortgage insurance will cover the lender’s shortfall. This is why reverse mortgage borrowers always have to pay expensive mortgage insurance premiums.
A reverse mortgage seriously complicates matters if someone was planning on inheriting your home. With a reverse mortgage, the only way your heir will be able to keep the home is to pay off the loan. Your heir may or may not qualify for a home loan to secure ownership of the home. Does your heir have good income and a high credit score? Securing a home loan requires adequate income to pay back the loan and good credit. If you heir isn’t qualified the family home would be sold to a stranger to satisfy the reverse mortgage debt.
2. If you live with someone, they may be forced to move.
Does a spouse, relative, roommate, friend or boarder live in the home you want to take out a reverse mortgage on? If so – and if that person is not on the loan with you – he or she won’t have a place to live after you pass away. That person won’t even be able to keep living there if you move into a care home. One of the conditions of a reverse mortgage is that the borrower has to live in the home. If the borrower passes away, sells the home, or moves out, the loan becomes due in full. And if someone living with you isn’t at least 62, he or she cannot be a borrower on the reverse mortgage.
These loan conditions shouldn’t stop you from getting a reverse mortgage if the person who lives with you could move out and rent another place. But if that person is a relative or your spouse, who has an emotional attachment to the home and depends financially on being able to live there, realize that you would be potentially forcing them to move out of the house if you can no longer live there yourself.
3. If you need the money for medical bills, and then have to move, the reverse mortgage will need to be paid back in full.
Expensive health care can cause seniors to turn to a reverse mortgage as a way to pay their medical expenses.
The funds can help if you are well enough to remain in your home, however, if your health deteriorates and you can no longer live in your home, you will need to repay the reverse mortgage because, as noted above, lenders require that borrowers live in the home as their primary residence. That means you may need to repay the mortgage just at the point when you will likely need funds the most.
Moving into a nursing home or assisted living for 12 months or more is considered a permanent move under reverse mortgage regulations. Borrowers are required to certify in writing each year that they still live in the home that they are borrowing against. And remember, if you cannot repay the reverse mortgage, the lender will foreclose on the home and sell it to repay the loan.
4. If you may be moving soon, the move will trigger the reverse mortgage to be due in full.
If you’re thinking about moving – because of your health or for any other reason – a reverse mortgage is not a good idea. The high upfront costs including the loan origination fee along with ongoing mortgage insurance premiums and closing costs make a reverse mortgage too expensive to be a good option.
Once you move or sell your home, a reverse mortgage becomes due in full and you’ll only a few months to repay the loan. Any sale proceeds above what you owe are yours to keep, but you’d get a lot more from selling your home if you hadn’t recently paid thousands of dollars in reverse mortgage loan costs.
5. If you can’t afford property taxes, homeowners insurance and home maintenance, you could lose your home.
If you are not able to afford to pay your property taxes or homeowners insurance premiums or to maintain your home in good repair, even with your reverse mortgage payments, you should not get a reverse mortgage. Failing to keep up in any of these areas means the lender can call the reverse mortgage due and you can lose your home.
If you need money but a reverse mortgage seems like a bad idea after looking into it, know that it is not your only option. Selling your home and downsizing to something more affordable is one alternative if it will alleviate your financial stress and improve your overall quality of life. Another option might to be sell one home to buy another one that has a separate rental option or you might consider renting out a bedroom in your existing house if you don’t mind sharing space. Just be sure to do a thorough background check and check references.
Other possibilities include getting a home-equity loan or home equity line of credit, or refinancing with a traditional mortgage. These options can provide funds if you can qualify for a loan and make the monthly payments. And if you use the funds to construct an accessory dwelling unit – you will also generate revenue to better your financial position.
Talk to an experienced Realtor about your options and also to a reputable lender or a financial planner. Talk to all three, the more information you get, the better.