Is a reverse mortgage a bad idea?
Like any financial decision, there are reasons why a reverse mortgage may not be right for you, depending on your unique situation, your retirement goals and your lifestyle needs. There’s no one-size-fits all solution.
Any mortgage would be a bad idea if you can’t meet your loan obligations, which includes keeping current with property taxes, insurance, maintenance, and any homeowners association fees — because failing to meet these obligations will put you at risk of foreclosure. So, with a reverse mortgage, every applicant must go through what’s called “financial assessment,” to help ensure you have the ability and willingness to meet these loan obligations.
It would also be a bad idea to take out a reverse mortgage (or any loan) for capricious purposes, such as funding an extravagant lifestyle, or a risky investment.
FINRA, the Financial Industry Regulatory Authority, provides some helpful guidance in its alert “Reverse Mortgages: Avoiding a Reversal of Fortune.”
On the other hand, for many retirees, a reverse mortgage offers the opportunity to maintain a comfortable lifestyle. This type of loan gives borrowers access to the equity they’ve built, while still owning and living in your home — without mandatory monthly mortgage payments. However, as with any mortgage, you must meet your loan obligations, keeping current with property taxes, homeowners insurance, maintenance and any homeowners association (HOA) fees.
Here are several more reasons why a reverse mortgage may not be right for you:
You don’t meet the age requirement. Age is among the biggest potential disadvantages of a reverse mortgage. To qualify for a traditional reverse mortgage, all borrowers on the home’s title must be at least 62 years of age. This is the rare occasion you may find yourself wishing you were a few years older! But, a new loan option available in certain states, an Equity Elite Reverse Mortgage, is available to borrowers as young as age 60.
You don’t plan on having cash flow issues…ever. Congratulations to those that have saved over the years to ensure financial security in retirement. But like life insurance, many are smart enough to see the value in planning for the unexpected. Your current financial situation may be stable now, but this stability is not guaranteed for the years ahead.
A reverse mortgage can be used to turn part of the equity in a home into funds to consolidate credit card debt, reduce monthly bills and more. If you don’t foresee having any cash flow issues now or in the future, a reverse mortgage may not be necessary for you.
You don’t need a standby line of credit. We all know that life happens: unplanned medical bills, unexpected car repairs, unforeseen home repair expenses. Do you have enough savings to handle unexpected expenses? Establishing a line of credit that you can tap into as needed is not a bad idea to help alleviate financial worry and gain peace of mind. By having the funds from a reverse mortgage line of credit available, you may avoid having to sell stocks or other assets — so you can hold onto productive investments and continue to collect interest or dividends.
You don’t own your home. You must be a homeowner (or homebuyer) to qualify for a reverse mortgage. If you don’t own your home, a reverse mortgage won’t be able to aid your financial plan for retirement.
A reverse mortgage is a last resort loan. This is an unfortunate and common misconception. A reverse mortgage is not for everyone, but it’s not something to be ashamed of either. In fact, many savvy middle-class and affluent homeowners use a reverse mortgage strategically — for example, as a safety net in case of emergencies, or as a financial tool to increase one’s liquidity. There are different types of loans for different situations and stages of life — student loans, first-time homebuyer loans — and this is a loan designed specifically to provide increased financial flexibility to people who are in or approaching retirement. Thanks to many product advances that have made reverse mortgages more attractive, academic researchers at respected universities, like Wade Pfau, Ph.D, CFA, Professor at The American College, have developed effective strategies for using a reverse mortgage as part of an overall retirement plan. Today, financial advisors are increasingly viewing them as an important option and valuable financial tools to be considered.
You don’t need financial flexibility. If you prefer to have fixed monthly payments, a reverse mortgage might not be right for you. Unlike a traditional home equity loan or line of credit, a reverse mortgage does have a flexible repayment feature: You can pay as much or as little as you like toward the principal and interest each month, or defer repayment — it’s strictly up to you, as long as you meet your loan obligations (keeping current with property taxes, insurance, maintenance and any HOA fees).
So… is a reverse mortgage a bad idea?
That all depends on your borrowing needs. As we have explained, a reverse mortgage is not right for everyone, but like any other loan it is a viable option to help individuals secure the financial resources they may need to meet their retirement goals. Whether you’re planning your own retirement or helping a loved one prepare, a reverse mortgage from a reputable and trustworthy reverse mortgage lender can help simplify the process by answering all your questions, addressing any concerns promptly and in a straightforward way, and helping you determine the best course of action for your financial circumstances.
Reverse Mortgage Funding LLC can help you better understand the pros and cons of a reverse mortgage, and give you the insight you need to make an informed decision about what’s right for your situation. Start your research by calling a knowledgeable reverse mortgage specialist today at (888) 277-1567.
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If you have equity in your home and believe you meet the eligibility requirements, a HECM may be the option that could help you retire smart.
Equity Elite Reverse Mortgage™ (“Equity Elite”) is Reverse Mortgage Funding LLC’s proprietary loan program, and it is not affiliated with the Home Equity Conversion Mortgage (HECM) loan program, which is insured by FHA. Equity Elite is available to qualified borrowers who may also be eligible for HUD, FHA’s HECM program or are seeking loan proceeds that are higher than HUD, FHA’s HECM program limit. Equity Elite currently is available only for eligible properties in select states. Please contact your loan originator to see if it is currently available in your state.
Upon a maturity event, any non-borrowing individuals with an ownership interest in the property, including non-borrowing spouses, will have 90 days to purchase the property from the estate or, if the non-borrower inherits the property, pay the loan in full using any sources of funds available to them. Any non-borrowing individual, including a non-borrowing spouse, should have a plan to pay off an Equity Elite reverse mortgage upon the borrower’s death or any other maturity event. If the non-borrower is unwilling or unable to purchase the property or pay the loan in full, there is no protection for the non-borrower (including a non-borrower spouse) to maintain an interest in the home or to continue residing in the home past the maturity event and the non-borrower may be evicted upon foreclosure. The FHA HECM program has protections in place for certain non-borrowing parties, so a reverse mortgage applicant with certain non-borrowing parties should strongly consider a FHA-insured HECM loan (see HECM guidelines or ask an RMF representative for details). Under the Equity Elite reverse mortgage loan program, a maturity event occurs when the last surviving borrower no longer lives in the home as his or her primary residence for at least 12 months, the property charges (including taxes, insurance, HOA dues or any other property charges) are not paid, required repairs are not completed or the property is not maintained, or any other maturity event, as specified in the Security Instrument, occurs.