In a recent column, you provided advice to the relative of an underemployed person who owned a home free of mortgage but was in financial distress with inconsistent cash flow and was falling in arrears with their property taxes.
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Wouldn’t a reverse mortgage work here, providing a consistent cash flow? What would be any possible downsides? Is there a minimum age requirement for reverse mortgages (since we don’t know the person’s age but who is probably, if not close to being, a senior citizen because the mortgage is paid off)?
Thank you for your comment. We aren’t huge fans of reverse mortgages, though they can be useful in some circ*mstances. Let’s walk through the issue and see if a reverse mortgage might work here.
If we assume the person seeking a reverse mortgage was 62 years old (the minimum age to get a reverse mortgage), and owned the home outright (or had a very small mortgage), that person might qualify for a reverse mortgage. But we’re not sure that taking money from the equity in the home to pay for her housing expenses would solve our reader’s problems, and that is often the best use for a reverse mortgage. For that reason, we suggested that our reader consider selling the home.
Reverse mortgages require a lot of forward thinking
While you are correct that our reader didn’t have a mortgage on the home, our reader appears to have accumulated some debt over time due to her inability to pay her living expenses. So the question is: Would it be worthwhile to get a reverse mortgage and use the proceeds to pay off her debt issues?
Since we don’t have exact numbers, let’s walk through a hypothetical situation. If we assume the home was worth around $100,000 and she had about $10,000 in debt to pay off, she might get about 50 percent of the home’s value through a reverse mortgage. She also might have paid $5,000 or more in fees to get that reverse mortgage (though this is generally built into the loan). With this scenario, she would take out $50,000 and use $10,000 to pay off her debt, leaving her with $40,000 in cash.
More Matters: Tax implications vary depending on how investment home was used
We were also told that she had accumulated the $10,000 in debt over the prior few years, so our reader with the reverse mortgage could expect to run out of money at the rate of her expenses within the next 10 or so years. That might have kept her in the home, but at the end of the 10 years she would have blown through half her equity in the home (assuming that the home appreciated a bit, but there’s interest tacked onto the reverse mortgage) and she would be around 75 years of age.
We thought it might be better for her to evaluate her living situation and make a decision to sell based on her current income and expenses. What happens if she lives to be 95? If she eats up half her equity but only gets 10 years out of it, what will happen after that? And she’ll still have home maintenance expenses, property taxes and insurance premiums to pay.
More Matters: How to save on income taxes when selling a home
Instead, imagine she sells the home and downsizes to something that’s more affordable based on her projected retirement income. She could invest the $100,000 she gets from the home and use it for some extras or for an emergency fund.
Given that the home seemed to be her largest expense, we thought it would be better for her to look at alternative living situations with the hope that she might find something to her liking but at a much lower monthly cost. At the same time, she’d have any money she had from the sale of the home in the bank.
Ilyce Glink is the creator of an 18-part webinar + ebook series called “The Intentional Investor: How to be wildly successful in real estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.
FAQs
You anticipate staying in your home for a long time – Since you'll pay another set of closing costs with a reverse mortgage, ideally, you'll want to stay in the home long enough to break even on the expense. If you're 62 and expect your current place to remain your forever home, a reverse mortgage could make sense.
How do you know if a reverse mortgage is good for you? ›
Reverse Mortgage Suitability Checklist
| Suitability Factors | Good Fit for Reverse Mortgage |
|---|
| Financial Situation | Need for additional income, with limited cash flow options |
| Legacy Concerns | Less concerned about leaving home equity to heirs |
| Maintenance and Expenses | Able to maintain home and keep up with property-related expenses |
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The downside to a reverse mortgage loan is that you use your home's equity while alive. After you pass, your heirs will receive an inheritance based on whatever money you use and interest that accrues on the money you borrow.
What is the biggest problem with reverse mortgage? ›
A reverse mortgage increases your debt and can use up your equity. While the amount is based on your equity, you're still borrowing the money and paying the lender a fee and interest.
What is the 60% rule for reverse mortgage? ›
Called the initial principal limit, you can only withdraw 60 percent of your available equity during the first 12 months, with the remaining equity becoming available after the first 12 months. The only exception is if your mandatory obligations exceed 60 percent of your available equity.
What does Suze Orman say about reverse mortgages? ›
Taking a loan too early
The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.
How many people have lost their homes due to a reverse mortgage? ›
A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.
Why are so many people disappointed by reverse mortgages? ›
Smaller Inheritances and Greater Hassles for Any Heirs
A reverse mortgage can also deplete much of the homeowner's wealth, especially if their home is basically all they have, leaving little behind for their heirs.
Why do people say reverse mortgages are bad? ›
Reverse mortgages have extremely high fees compared with other options and are usually a bad idea for most people. They are an especially bad idea for anyone with a family home that they want to leave to their heirs.
Can you lose your house with a reverse mortgage? ›
Just like a traditional mortgage, with a HECM you are borrowing money and using your home as security for the loan. You must continue to pay for property taxes, homeowner's insurance, and make repairs needed to maintain your home or the lender can foreclose on the home.
Cons. As with all reverse mortgages, interest rates are higher than with a traditional mortgage. The loan balance and interest increase and your home equity decreases over time.
What happens if you live too long on a reverse mortgage? ›
If the end of your term is up before you pass away, then you have outlived your reverse mortgage proceeds. With a term payment plan, you reach your loan's principal limit—the maximum that you can borrow—at the end of the term. After that, you won't be able to receive additional proceeds from your reverse mortgage.
What is the life expectancy of a reverse mortgage? ›
Technically speaking a Reverse Mortgage is guaranteed by HUD/FHA until age 150 of the youngest Borrower. But because that number is still so far above current life expectancy the real answer is that a Reverse Mortgage will last as long as you need it to.
What is the monthly payment on a reverse mortgage? ›
However, unlike a traditional mortgage, with a reverse mortgage loan, borrowers don't make monthly mortgage payments. The loan is repaid when the borrower. Interest and fees are added to the loan balance each month and the balance grows.
Can you get 100% of the equity in a reverse mortgage? ›
However, you cannot get 100% of your home equity. Assuming that the value of your home does not exceed the FHA lending limit, your maximum reverse mortgage amount, called your “Initial Principal Limit,” is calculated by your lender based on the following.
How hard is it to get out of a reverse mortgage? ›
If a borrower chooses to change their mind about a reverse mortgage, they only have to alert their lender in writing within the allowable three business days from signing. The lender must then cancel all loan documents and return all fees, closing costs, and unused funds paid by the consumer within 20 days.
Who benefits most from a reverse mortgage? ›
The reverse mortgage is most suitable for homeowners looking to remain in their home but see a need or benefit of having additional funds available. They do not want to have the burden of monthly mortgage payments in their monthly budget.
What is the best age to take a reverse mortgage? ›
You generally aren't eligible for a reverse mortgage until you reach age 62, and the older you are after that, the more you're often able to borrow.
What is the best age to take out a reverse mortgage? ›
Reverse mortgages were meant to help seniors in or nearing retirement. Because of this, the reverse mortgage age requirement is 62 or older. You must be at least 62 years old to get a reverse mortgage.
