There’s no question a HECM reverse mortgage is a great financial tool. However, any good reverse mortgage professional will acknowledge that it’s not the right solution for everybody. Just as there are good reasons to get a reverse mortgage, there are also several reasons not to get a reverse mortgage.
Before we cover some reasons to avoid a reverse mortgage, let’s first go over what a reverse mortgage actually is. There’s a lot of misinformation out there, so I want to make sure you know the basics before I identify some reasons not to get a reverse mortgage.
What is a Reverse Mortgage?
The most common reverse mortgage product by far in the United States today is the federally-insured home equity conversion mortgage, or HECM (often pronounced heck-um by industry insiders). If somebody you know recently got a reverse mortgage, it’s a good bet it was a HECM.
A HECM reverse mortgage is a type of home loan designed to give homeowners 62 years of age or older the ability to convert a large portion of their home’s value into tax-free cash that can be used for any purpose. Borrowers frequently use reverse mortgage proceeds to eliminate existing mortgage payments, pay off other debts, supplement income, or supplement retirement assets.
As long as at least one borrower (or non-borrowing spouse) is living in the home and paying required property charges (such as property taxes, homeowners insurance, etc.), no monthly mortgage payment is required and the money does not have to be paid back.
Again, no mortgage payment is ever required, the borrower(s) always retains title ownership of the home, and the home can be left to heirs.
A Few Reasons Not to Get a Reverse Mortgage
So what are some reasons not to get a reverse mortgage? Having talked to and worked with thousands of clients over the years, I can think of two big reasons a reverse mortgage might not make sense.
1) You need to maximize your equity and pass it on to your heirs. Everybody has a different financial situation and goals when they seek a reverse mortgage. If one of your financial goals is to leave as much equity as possible to your heirs, a reverse mortgage clearly doesn’t make sense. The whole point of the reverse mortgage is to convert equity into cash, which means your loan balance increases and your equity decreases over time.
2) You plan to move soon. Though there’s no limitation on selling and moving once you have a reverse mortgage, it’s better suited for people that plan to stay in the home for a while. If you know you’re going to be selling your house and moving within the next year or two, it might make sense keep things as they are for now. If you end up selling and buying another house, you can always use a reverse mortgage to finance the purchase of the new home.
The reverse mortgage typically has some closing costs that need to be paid to get it done, so it’s probably not a cost effective solution if you don’t plan to be in it very long.
3) You need a relatively small amount of cash and plan to repay it quickly. If you just need a few thousand or tens of thousands of dollars and plan to repay it quickly, a reverse mortgage is probably overkill. A better solution would be a home equity line of credit (HELOC), but make sure you pay the money back in before the end of the draw period to avoid potential headaches. HELOC payments typically increase substantially at the end of the draw period.
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