The Only 6 Times a Reverse Mortgage Makes Sense | Mortgages

Reverse mortgages have come a long way since they were first introduced. Gone are the days when a surviving spouse might be required to move out after the death of their partner or when children might find their parents owed more than their house was worth.

Still, reverse mortgages come with fees and interest rates that mean they are not right for everyone or every situation.

“You have to be committed to spending a lifetime there,” says Burney Ashley, strategic financing advisor at Real Estate Bees. “These payments, they’re not free.”

Once a borrower moves out of the home or passes away, they or their estate must pay back the loan balance. If you only plan to live in your home for a few more years, it might be hard to justify the cost of a reverse mortgage. However, for those who have no plans to move, a reverse mortgage can make sense in the following situations.

One caveat: Proprietary reverse mortgages may have different provisions and lack the protections of federally insured loans. Be sure you read all the fine print.

A reverse mortgage can provide a source of income to early retirees or those waiting to begin Social Security. That was the case for one of Ashley’s clients. He had about five years until he expected to begin Social Security benefits and used a reverse mortgage to provide income during that time.

“The line of credit that can be built into a reverse mortgage is a real game changer,” says Michele Albohn, a certified reverse mortgage specialist with Coast2Coast Mortgage.

With a reverse mortgage line of credit, early retirees can use only as much money as they need until other forms of income become available. Then, they can either pay back the amount borrowed or leave the balance plus interest to be paid off after they move or pass away.

Note that federally insured reverse mortgages are only available to those 62 or older, although some proprietary reverse mortgage products may be an option for borrowers as young as 55.

“A lot of our older seniors use (reverse mortgages) for health care,” says Barbara Sica, vice president of reverse sales for lender New American Funding.

Medicare won’t pay for long-term care, and those who want to age in place – that is, stay in their homes indefinitely – can use a reverse mortgage to pay for home health care. If someone needs to permanently move to a facility, the reverse mortgage would need to be repaid after they move, unless there is a spouse who will remain in the home.

A reverse mortgage can also be used to pay for home updates that make it possible to age in place. For instance, funds could be used to add a ramp to the entrance, make a bathroom accessible or create a bedroom on the main floor.

Older Americans may find themselves unable to pay their bills. Maybe their spouse died and they lost that person’s pension, or their Social Security payments aren’t keeping up with the cost of living.

“A reverse mortgage is a way to be able to access home equity to create a better life,” Albohn says.

Money from a reverse mortgage can cover monthly bills and may even help people avoid foreclosure. Someone having difficulty making their mortgage payments can take out a reverse mortgage using the equity in their house. Then, the reverse mortgage can be used to pay off the original home loan, eliminating their monthly mortgage payment. Once they move or pass away, the house can be sold to pay off the reverse mortgage.

“We’ll actually roll in what we call LESA,” Ashley says. Standing for life-expectancy set-aside, this is money reserved for expected increases in property taxes, homeowners insurance and other mandatory fees like HOA dues. “Now, we’re in a situation in which a foreclosure is absolutely unforeseeable.”

You could also use a reverse mortgage to purchase a home, Sica says. This scenario works when someone has an existing home to sell.

The homeowner can sell their existing home and then use the proceeds as a down payment on a new home. The new purchase may require a regular mortgage, but once the transaction is complete, the homeowner can take out a reverse mortgage based on the equity. The reverse mortgage can be used to pay off the regular mortgage, resulting in no monthly principal and interest payments required for the new property.

Retirees might use this strategy to move closer to their children or to a location with a more favorable climate.

Sequence of returns risk refers to what can happen to your retirement account if you withdraw a significant amount when the economy – and your portfolio – is in the midst of a downturn. Those withdrawals lock in losses and can mean your retirement fund is permanently stunted, leaving you at risk of running out of cash.

Homeowners can avoid this risk by using a reverse mortgage for income during periods when retirement investments are losing money. Once the market rebounds, they can go back to pulling their income from retirement funds.

Some people are hesitant to take out a reverse mortgage because they believe it means giving up ownership of their home, according to Ashley. He says this is a common myth and incorrect. “You are always the owner,” he says. “You never come off the deed.”

Beyond taxes and insurance, a reverse mortgage doesn’t require payments while you or your spouse live in the home. But eventually, the amount borrowed will need to be repaid. That generally means the house must be sold.

If you planned to pass your home on to your children – perhaps it has been in the family for generations – then a reverse mortgage is probably not a good option for you. However, if you don’t have heirs or don’t mind if your kids have to sell the house after you’re gone, a reverse mortgage can provide a significant source of cash for your golden years.

“Right now, the economy is killing our seniors,” Sica says.

A reverse mortgage can provide financial breathing room, but be sure you understand the loan’s provisions and costs as well as how it will affect the inheritance you leave your children.