Reverse Mortgages: Why to Avoid Them

Retirees are living longer than they may have anticipated, and for those who own their homes but are cash-poor, a reverse mortgage might seem tempting. But don’t be taken advantage of. These are often expensive and unnecessary. Though reverse mortgages have their place, it’s a rare one. Be cautious.

Reverse mortgages involve homeowners looking to borrow money against their houses. The mortgage doesn’t need to be repaid until the mortgage holder passes away or moves out of the home (to a nursing home, for instance), at which time the loan can either be repaid or the house will be sold to repay the debt.

The most common reverse mortgage is the home-equity conversion mortgage. These mortgages are insured by the federal government through the Federal Housing Administration with a maximum loan amount of $417,000.

Loans are given based on the value of your home and your age. The fees associated with this type of reverse mortgage are origination fees, closing costs, appraisal fees and mortgage insurance premiums.

For people thinking about reverse mortgages, the house needs to be owned by people over 62 years of age and who own at least 65% of the house to qualify. The rate for a reverse mortgage is also determined by the youngest person who owns the home, so a 70-year-old person who is co-owner of a home would lower the rate her 75-year-old spouse would otherwise get. And once a reverse mortgage is taken out, it increases the person’s income, which may have a negative impact on receiving Medicare and other need-based programs.

Reverse mortgages are for people who have exhausted all of their other options and want to remain in their homes for the duration of their lives despite expenses such as property taxes, insurance and home maintenance.

One alternative to a reverse mortgage is selling the home and moving into a smaller place or an assisted living facility. Another possible alternative would be to sell your home to your kids. This could also impact your family’s inheritance tax later.

There are a lot of reasons not to take out a reverse mortgage. If you’re considering doing so, we highly encourage you to seek professional advice from a tax accountant, cpa, or lawyer.