With 1 in 5 Americans having no retirement savings, it should not come as a surprise that a reverse mortgage is sometimes something people turn to in order to try and solve a financial problem at retirement. A reverse mortgage might seem like a good way to come up with some extra money for daily living expenses, medical bills, or to provide the money needed to stay in a home. However, taking a reverse mortgage is almost always a bad idea and there are several reasons why.
What is a reverse mortgage?
A reverse mortgage is a type of loan product for homeowners that are 62 years and older. It lets a homeowner exchange part of the equity in a house for cash. This might sound like a traditional home equity loan. However, the big difference and appeal of a reverse mortgage is the money borrowed does not have to be paid back until the borrower no longer lives in the home as their principal residence or the obligations of the loan can’t be met. Not meeting the obligations of the loan is a big warning that I will get back to shortly.
Reverse mortgages seem like a good idea on the surface. After all, there are a lot of different celebrities that appear to be very trustworthy endorsing them. Although a reverse mortgage might look like it could solve a difficult financial situation in retirement, anyone considering a reverse mortgage should use extreme caution before making a final decision. They are a dangerous loan product that can have devasting consequences.
What makes a reverse mortgage a bad idea?
A reverse mortgage won’t solve big financial issues that already exist.
Often a reverse mortgage is considered when there are already big financial issues during retirement years. This could include coming up with the money for medical care or paying for essential living expenses. The problem is the money from a reverse mortgage is never entirely the amount that someone would likely qualify for and once the fees and expenses are added in along with interest the amount of money borrowed on a reverse mortgage is not often what someone believes they will receive in the long run.
If there have already been financial issues for some time, a reverse mortgage isn’t likely to solve those issues in the long-term. The result will only be a band-aid in the short-term and the result will be receiving a lot less money for a home than it is worth.
Fees and expenses for a reverse mortgage can add up to a lot of money.
There aren’t many people who will do something for free and taking on a reverse mortgage will have costs. Some people think in terms of a reverse mortgage just like a traditional home equity loan. However, this is anything but further from the truth. Reverse mortgages are packed with fees and expenses and most borrowers are already looking for a way to get some extra money so they do not have the upfront money to pay these extra charges. Thus, much of the extra cost for a reverse mortgage is often rolled into the life of the loan. This ends up costing the borrower much more money.
Reverse mortgage lenders might charge up to 2% of a home’s value in just an origination fee that they require to be paid upfront. This could add up to $4000 for a home with a value of $200,000. A reverse mortgage also has fees for closing costs, credit checks, and appraisals similar to a traditional home equity loan.
Just because you might qualify for a $100,000 reverse mortgage doesn’t mean that you will get that exact amount. Furthermore, you will end up paying a lot more in the long run with interest, fees, and expenses on borrowing that $100,000.
Advertisers often claim a reverse mortgage borrower will not pay more than a home is worth, but this is also never entirely the full story. A 62-year-old borrower that takes on a 100k reverse mortgage for 25 years at 5% will accumulate $238,635 in interest. This results in $338,635 owed on a $200,000 home.
For someone needing a little extra money in retirement, taking a reverse mortgage can deplete even more money than a person might not be able to part with. It could seem like a good idea in the short-term but the financial cost will be much more over time.
With a reverse mortgage, you are risking the loss of your home.
The largest risk of taking a reverse mortgage is losing a home. This is a big danger of taking any type of loan out on the equity of a home. For this reason, a reverse mortgage is almost always a bad idea.
Most of the time people take a reverse mortgage in the first place because they are having some issues with money. The problem is a reverse mortgage does have terms that do require some items to be kept up with in order to stay in the home. This includes keeping up with insurance payments and taxes. If a homeowner falls behind on these and is not able to pay them, the lender can take the home.
Taking a reverse mortgage is often where a person at retirement turns when they are tight on money and have nowhere else to turn. The problem is bills always do seem to pile up. Take a reverse mortgage and then your taxes and insurance go up how will these bills be maintained?
Having a place to live is a necessity in life. We all need a roof over our head. For a retiree on a fixed income, a home loss is a real possibility with a reverse mortgage and a chance that should not be taken.
There might not be any inheritance money left with a reverse mortgage.
For some people, it is important for them to leave some money for loved ones when they pass away. With a reverse mortgage, the loan needs to be repaid when the homeowner passes. Either an heir can sell the home to pay the reverse mortgage balance or they can pay the loan back and keep the house.
When a home with a reverse mortgage does sell for more money than the loan balance the heirs do get to keep the difference. However, this is not always the case that a home will be worth more than the reverse mortgage.
Sometimes people have a wish to keep a home in their family and pass it on to another member when they die. With a reverse mortgage taken out on a home, this might not be possible. Heirs will often likely have to sell a home in order to pay the loan.
Other people living in the house with a reverse mortgage might have to leave.
Someone that decides to take a reverse mortgage needs to be at least 62 years of age. Other people might also live with the person that takes out a reverse mortgage. This could include friends or relatives. If the homeowner that takes out a reverse mortgage dies or moves out, other people living with them might also need to get out of the house.
The problem is a reverse mortgage requires the borrower to live in the home. A home that has a reverse mortgage needs to be the primary residence for the borrower. If other people living in a home with a reverse mortgage are under 62 and not listed on the loan, they will have to vacate the home when the borrower passes away or leaves.
Needing to relocate to assisted living will likely make a reverse mortgage due.
Although some financial experts would argue that a home should not be a big part of someone’s nest egg for retirement, the truth is that often a home is just this. When someone takes out a reverse mortgage this can take a big amount of the money out of a home that will not be available for a nursing home or assisted living. Furthermore, when the borrower needs to move from the home where the reverse mortgage was taken the loan then becomes due. It could take a while to get any remaining money out of a home depending on how long it takes to sell.
What is a better alternative than taking a reverse mortgage for some extra money in retirement?
It can be hard to think about moving out of a home you might have lived in for twenty or thirty years if this is the case. However, downsizing or moving into something less expensive is usually a better answer. Sell a home and make the difference in downsizing to either something smaller or just less expensive. The savings in fees and expenses will be well worth it. Downsizing to something with less upkeep, lower taxes, and insurance also only makes sense to save even more money.
By not taking a reverse mortgage and downsizing instead, it reduces the risk of losing a place to live by not keeping up with the requirements on a reverse mortgage. Living without a reverse mortgage also offers the flexibility of being able to move again without the balance of a loan coming due. For loved ones left behind after a person dies, not having a reverse mortgage makes for a lot less of a headache in trying to settling an estate.
I have to say it makes me a little angry seeing the paid actors that take the money to endorse reverse mortgages as the answer to living a comfortable retirement. What you need to remember is the people doing the commercials are just doing their job. They are paid actors. It is also easy to believe a reverse mortgage is a good thing when you have millions of dollars in the bank and will not have to worry about retirement yourself.
A reverse mortgage is not the answer to solving financial difficulties in retirement. These loan products are loaded with fees and expenses. They put an elderly homeowner in danger of not having a place to live. Reverse mortgages also can create problems for heirs that are left behind.
Although reverse mortgages seem harmless when they are explained on television by popular actors, the truth is they are very dangerous. Not only are the fees and expenses high with the danger of losing a home but reverse mortgage fraud is also a real possibility. The Federal Trade Commission (FTC) even warns consumers with the dangers of this.
For someone in retirement, a reverse mortgage is likely not the answer to solving a financial difficulty. They might appear like a good idea but a reverse mortgage is not the answer. It is better to look for any and all other alternatives before even considering it.
11 thoughts on “Why Is a Reverse Mortgage Almost Always a Bad Idea?”
Thank you for taking the time to write this article, they are not for everyone. Having just completed one for my Mom though, it is interesting to note that there is no more risk of losing your home with this type of mortgage than a regular one. I never would have done this with her if there was any greater chance of her losing her beloved home. If you fail to pay your property taxes or home owners insurance you can lose your home with any mortgage, even if you no longer have a mortgage you can lose it in this scenario. In 17 states you can even lose any equity in your home above and beyond what taxes you owe. Imagine losing your entire home because you defaulted on $1,000 in taxes and had $100,000 in equity!
Look it up, it is the truth:
“The State Took Her Home Because She Missed $900 in Property Taxes
Tawanda Hall’s house was worth $286,000 more than her overdue tax bill. There was nothing she could do about it.”
For us though it will help her live out her years in comfort and relieved the financial stresses of losing my Dad and now relying on just one income from Social Security. Reading the amortization schedule also is very important on any home loan product. I found that through the normal course of homes rising 4% per year on average according to FHA that there wasn’t a scenario I could find where it would be underwater when my Mom passes. Anything can happen in life, like back in 2006-08 when housing crashed but that would affect anyone equally as well.
Looking out, 5,10,15, 20, 25 years in the example you gave you do honestly need to factor this part in. According to my Mom’s amortization schedule, a $200,000 home with a 4% per year value increase would be worth just over $538,000. The loan balance if she uses all of the $100,000 would be very close to the $338,000 figure you mentioned. This means that there is still $200,000 in equity for her to disburse to whomever she wants in her will (minus Realtor fees etc.). Just a heads up, the rates right now were in the high 6% range, not 5%.
Not everyone is like me I realize, but I would rather have my Mom live her remaining years in relative comfort, surrounded by her (20+ years) support system than worry if I am to get her money when she passes. It’s not for everyone but it sure helped in our family situation.
I just backed out of a reverse mortgage deal because of the extensive financial losses involved in getting the loan. Looking forward , just did not feel that it was a good idea at all.
I’m being ‘pressured’ by a realtor who is supposed to be showing my home for selling..now she wants me to opt for a reverse mortgage..thank you for enlightening me!
I have read this article and spoke with my father and have decided that is am not going to do a reverse mortgage. I didn’t realize the mistake it would be. I am going to work on curb appeal so I can sell my house in a couple of years. Thank you for this article, between your article and my Dad I found it was an easy decision to make.
what if your house is fully paid for and you just want to take a big lump sum to invest with the rest of your money and to hell with the heirs?
Thank you so much for this important information. I too, feel angry when I see a trusted public figure endorse a product that I know from experience is a bad idea. I inherited a house with a reverse mortgage that had $100,000.00 against it on a house that sold in the $60,000.00 range. Luckily for me, a Deed in Lieu of Foreclosure was accepted, but I have read those holding the mortgage do not have to accept this arrangement. People really need to know the truth, that this is a very dangerous financial product being touted as a good thing. It isn’t.
Good information. I had heard rumors that Reserve Mortgage was not a good move. This article tells exactly why it might not be good in all cases.
As a financial planner, I NEVER advise any client to consider a reverse mortgage because of the pitfalls and hidden traps Eric Flynn so succinctly describes here.
Don’t ever gamble with the what could be your last home!
I’m so glad that I found this article. I’m currently being pressured into going into a Reverse Mortgage contract. The pressure has made me uncomfortable & suspicious. So, getting on board with doing as much reasearch as possible, got me to this website. Thanks so much for explaining something so complex, to something so simple, upfront & honest!!! You’re helping people & this is admirable. Thank You!!!
Thank you for the kind words. I am happy the information has helped. This is indeed why I write about the things I do.
Most old people are too stubborn to act on this advice, and as a result, they die in squalor and leave nothing to their heirs but headaches. Our system is designed to rid people of their wealth – unless you are prudent about it and talk to your parents before they get too old – they will fall prey to it. Most do. Been there, done that with my parents. Between the medical system, nursing homes and the banks, $2M in estate $ was bled dry in less than one year.