June 6, 2017 by HECM Pro
Like any financial product, the reverse mortgage isn’t inherently good or bad. It’s simply a financial tool. It’s “goodness” or “badness” is determined by how it’s used. If used for the wrong purpose, then it’s probably not a good idea to get one.
However, if it’s used for the right purpose, the reverse mortgage can do some pretty great stuff. Many seniors have found it to be literally life-changing.
So, yes, a reverse mortgage can be a very good idea – as long as it’s used for the right purpose.
What is a Reverse Mortgage?
The most common reverse mortgage in the United States is the FHA-insured and regulated home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders).
A HECM reverse mortgage enables homeowners 62 or older to convert a portion of the value of their homes into cash without giving up ownership of the home or taking on a mortgage payment. As long as at least one borrower lives in the home and pays the required property charges, no payments or payback are required. The following are some notable features of the HECM:
- No payment or payback is required as long as at least one borrower is living in the home and paying required property charges.
- You remain the owner of the home and are free to will it to your heirs. Your heirs will inherit any remaining equity in the home.
- The HECM is a non-recourse loan. This means you, your estate, and your heirs will never have to repay any more than the value of the home – regardless of how much you borrow.
- The HECM is insured and regulated by FHA.
- Proceeds are not subject to income taxes and do not impact Social Security or Medicare benefits.
- Proceeds can be taken as a lump sum payout, credit line, monthly income, or some combination of all of these.
Your obligations under the HECM program are simply to pay the required property charges and live in the home. As long as you do that, no payment or payback is required.
When Are Reverse Mortgages a Bad Idea?
One of the best ways to answer is a reverse mortgage a good idea? is to first identify when it may be a bad idea. The HECM reverse mortgage can be a great option for many seniors, but there are a few scenarios where it may not make sense:
- You want to leave the maximum possible home equity to your heirs. The reverse mortgage is designed to convert home equity into cash. If you want to leave the most home equity possible to your heirs, then a reverse mortgage clearly doesn’t make sense.
- You plan to sell and move soon. A reverse mortgage is a better option for homeowners who don’t plan to move anytime soon. If you know you’ll sell in the next year or two, it’s better to wait and do a reverse mortgage on the new home.
- You have a disabled person living in your home. If you have a disabled person who can’t care for themselves living in your home, a reverse mortgage could force them out if something happens to you. If you want them to live in the home after you die, you’ll need to provide a way for the balance to be paid upon your passing. The reverse mortgage has to be repaid in full once the last borrower permanently leaves the home. If it isn’t repaid, HUD requires the lender to sell the home to recoup the money lent.
- You plan to marry soon. A new spouse is not automatically “grandfathered” into the protections of an existing HECM. If you pass away and the reverse mortgage is only under your name, your spouse will have to either refinance or pay off the loan to remain in the home. If you’re getting married soon, it’s best to wait until after the wedding to get a reverse mortgage.
When Is a Reverse Mortgage a Good Idea?
So, when exactly is a reverse mortgage a good idea? Well, the following are some of the most common goals I hear from my clients:
- Eliminate existing mortgage payments
- Eliminate other debts, such as credit cards and auto loans
- Finance home improvements
- Supplement retirement income
- Pay off medical bills
- Increase liquid retirement assets
- Set up a rainy day or emergency fund
- Take a vacation
If any of these goals resonate with you, then a reverse mortgage could be a great option. Your home equity is essentially a giant savings account built up over many years of making mortgage payments, paying property taxes, and maintaining your home. Why not put it to work so you can live better in retirement? That’s what the reverse mortgage is designed to do!
So, is a reverse mortgage a good idea for you? It could be, depending on your goals. If tapping into your home equity enables you to live better and more financially secure in retirement, then a reverse mortgage could be a fantastic option for you.