When is a Reverse Mortgage Not a Good Option?
Most people at their retirement age have seen a commercial or heard an ad that promotes reverse mortgage – and they want to go for it. Besides, who wouldn’t? You can borrow against your home without credit and minimum income requirements.
However, that is just the upside of it. Reverse mortgages have some cons, too, which can ruin your retirement and land you in debt.
Reverse mortgages are popular again – thanks to increased boomers and advertisements. Since the industry is drenched in possibilities and risks, you better educate yourself before becoming another mortgage horror story.
Am I a Viable Reverse Mortgage Candidate?
To qualify for the mortgage, you have to be at least 62. Additionally, you must also;
- Pay a considerate amount of your mortgage or own the house outright
- Ensure the property is occupied as your main home
- Keep making payments on insurance, HOA fees, and taxes
- Meet other eligibility requirements
If you get approved for a reverse mortgage loan, you will sit through an information session offered by an approved counselor.
When is a Reverse Mortgage Bad for You?
In as much as these mortgages have fair advantages, there are some serious risks to consider. And in this post, you will learn about most of them. A reverse mortgage is wrong when:
1. The Home has Inheritors
If you care about your successor’s inheritance, then a reverse mortgage is probably not the best of options. When the homeowner dies, the house is sold to repay the loan. If the house sells for more than the loan balance, the heir gets the excess funds.
On the other hand, the heir gets no funds if the house sells for less than the outstanding loan amount, and the insurance covers the deficit. So, if you want to leave your children/spouse the house and they can’t afford to pay the loan, your home is sold to a total stranger.
2. You Have Medical Bills
At retirement age, most older adults have an illness or condition. When you get a reverse mortgage to pay bills, you jeopardize your home and those who live in it.
If your condition worsens and you move to a retirement home or treatment facility, you must repay the loan in the total amount. The reason is, the home will no longer be your primary residence.
Every year, you are required to certify in writing that you still live in the house you are borrowing against. Otherwise, your home will go into foreclosure.
3. You Plan on Moving/Selling Soon
If you are planning to relocate soon, a reverse mortgage is a terrible idea. The short-run costs make the whole loan impractical and expensive.
Plus, you must pay off the loan in full when you move out. Even if you are in desperate need of funds, a reverse mortgage is simply not the answer in this situation. The total up-front mortgage costs, as well as moving costs, are detrimental to your retirement.
4. It Affects Other Retirement Benefits
A reverse mortgage is not considered as income, so it will not affect your taxes. Still, it can potentially affect your eligibility for other government programs and benefits like SSI or Medicaid.
Therefore, always consult with your counselor or mortgage specialist to ensure you are not making a mistake.
5. You Can’t Afford Costs
If you cannot afford the costs that come with house maintenance and insurance, you risk foreclosure. These costs include;
- Property taxes
- Homeowners insurance and insurance premiums
- Home maintenance costs
Lacking to stay current in any of these costs and your lender will call your loan due. This step will result in foreclosure if you can’t pay the outstanding loan balance.
What Are Your Options?
Are you a terrible candidate for a reverse mortgage? Worry Not! There are lots of options to meet your financial needs. You can do a cash-out refinance and get funds by refinancing your current mortgage. Thus, you will quickly meet your income shortage.
Next, you can sell your home and downscale. Selling your residence and moving to a rental or smaller house can solve your budget needs. Renting will save you a lot of money since you won’t have homeownership costs.
Lastly, you can sell other resources you have like stock, land, and valuable items. You will raise money and avoid losing your home – a win-win situation.
The Bottom Line
All factors considered, reverse mortgages have their pros and cons. Before you make any final decisions, ensure you explore every option you have. If you cannot comply with all the terms and requirements of the loan, forget about getting a reverse mortgage.
To borrow or not to borrow? This is a choice you have to make after evaluating your current and future financial status. As much as there are benefits, there are also complications, so choose wisely!