Retirement Planning

5 Reasons to Say “No” to a Reverse Mortgage

According to CNBC, homeowners gained an average of $15,000 in home equity last year — a collective gain of $908 billion. To sustain a comfortable retirement lifestyle, tapping into your equity in the form of a reverse mortgage can seem like a smart idea. But is it the best idea for you? 

Designed for homeowners and homebuyers age 62 and older (though in some states there’s now an option for those age 60 — more on that below), a reverse mortgage loan allows you to borrow against the equity in your home, giving you access to cash at closing, monthly advances, a line of credit, or a combination of these.¹ Most reverse mortgages are Home Equity Conversion Mortgages (HECMs), although some lenders have their own proprietary products.  You can use the funds from a reverse mortgage to supplement your income, pay for healthcare, get relief from monthly debt payments, buy a new home, and more.

No loan option is completely without its disadvantages, however, and there may be downsides to a reverse mortgage you may have not considered.

Here are 5 reasons why you may opt against a reverse mortgage:  

1. You think you will move in the next 5 years. You need to evaluate if this is right for you. There are upfront costs, as with any loan, so evaluate your options and crunch the numbers – it may or may not be financially worthwhile to take out a reverse mortgage on your current home. However, if you do plan to move, consider the benefits of a HECM for Purchase loan — which can make it easier for you to afford to buy the home you really want. 
2. You own a higher-value home and can’t access enough equity. With any reverse mortgage, how much you can borrow depends on a number of factors, including home value. If you live in a home worth over $700,000, a HECM's limitations on how much you can borrow might not work for you. However, that does not mean a reverse mortgage is not an option. There are proprietary products on the market today that allow you to tap into even more equity than you can with a HECM. For example, there’s another option that’s available in certain states: the Equity Elite Reverse Mortgage, which allows loan amounts of up to $4 million. Equity Elite is designed for borrowers as young as age 60² — especially owners and buyers of high-valued homes. It can also be a good option for those looking to finance a condominium in a community that’s not FHA-approved,* and/or those seeking lower closing costs.
3. You are having a hard time paying for property taxes, homeowner’s insurance, and property maintenance. When you take out a reverse mortgage loan, the property remains in your name. And of course, as a homeowner, there’s no escaping property taxes. Contrary to popular belief, a reverse mortgage is not a loan of last resort. With a reverse mortgage, your loan obligations include keeping current with property taxes and homeowner’s insurance, as well as maintaining the property in good condition. If you have a homeowners association fee, you’re expected to keep current with that as well. If you’re looking for lower-maintenance living options and no property taxes or homeowner’s insurance, you might want to consider selling and renting instead.
4. You’re looking to build equity. No matter the type of mortgage, interest has a way of adding up. With a traditional mortgage, you build equity as you pay down your loan. With a reverse mortgage, your equity in the home decreases if you choose to defer repayment by not making monthly principal and interest payments; that’s because the loan balance increases over time due to interest. Many older homeowners, however, are not looking to build more equity. Instead, they want to leverage what’s already there as a retirement asset to help them live more comfortably and with fewer financial constraints.
5. You'd prefer not to complicate your government benefits. Good news — Social Security and Medicare are not affected by a reverse mortgage. However, needs-based programs like Medicaid or Supplemental Security Insurance (SSI) could be, so consult with a benefits professional about your specific situation.³

There’s no universal mortgage solution for everyone

While a reverse mortgage loan can be a lifesaver to the right borrower, they’re not right for everyone. As you near retirement, it’s important to understand all the financial options available to you, so you can make informed decisions sooner rather than later. And it pays to be proactive.

“Financial planning research has shown that coordinated use of a reverse mortgage starting earlier in retirement outperforms waiting to open a reverse mortgage as a last resort option once all else has failed,” says Dr. Wade D. Pfau, CFA and professor at The American College, in Forbes. “Reverse mortgages have transitioned from a last resort to a retirement income tool that can be incorporated as part of an overall efficient retirement income plan.”

You want to enjoy the rest of your life with more money — not less. It may be time to put your hard-earned home equity to work for you. Reverse Mortgage Funding can help. Call us at (888) 277-1567 to schedule a convenient phone appointment with a knowledgeable reverse mortgage specialist.

¹Borrowers who elect a fixed rate loan will receive a single disbursement lump sum payment. Other payment options are available only for adjustable rate mortgages.

²Not applicable in all states; some states may impose a higher age requirement. 

³Consult a financial professional. Visit www.ssa.gov. Reverse Mortgage Funding LLC (RMF) is not affiliated with the Social Security Administration or any government agency.

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.

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