Reasons to avoid a reverse mortgage
Reverse mortgages are a useful financial tool for seniors who have substantial equity in their homes and could benefit from tapping into that equity.
But reverse mortgages aren’t for everybody. Here are potential reasons why you may want to avoid entering into a reverse mortgage loan contract.
You have a much younger spouse
When a couple applies for a reverse mortgage, the loan’s principal limit is based on the age of the younger borrower. Recent changes in reverse mortgage law prohibit leaving a younger spouse off the loan contract as a way to increase the principal limit. This includes spouses who are under the qualifying age of 62.
For example, a 65-year-old with a $300,000 home can expect a principal limit of about $162,600. If the borrower has a 58-year-old spouse, the spouse becomes a non-borrowing spouse and the principal limit from the reverse mortgage drops to $150,000.
If a non-borrowing spouse is included in the contract, he or she can remain in the home after the borrowing spouse dies, but can no longer access any of the reverse mortgage loan funds.
You may be moving in a few years anyway
One of the factors that will make a reverse mortgage loan due is if the borrower permanently moves out. If that occurs, the homeowners will have to either repay the debt out of their pockets or sell the home and use the proceeds to satisfy the debt.
If you may move in a few years, you likely won’t receive enough benefit from the reverse mortgage to justify the upfront fees and interest you’ll pay to obtain the loan.
You want to keep your home in the family
When you pass away, you will not be able to transfer the home to your children or other heirs unless you repay the loan using other funds. The way reverse mortgages are set up is that the borrower isn’t saddled with loan payments during his or her lifetime. The loan is repaid once the home is sold, with the proceeds from that sale. Any money from the sale above and beyond the loan payment amount stays with the borrower’s estate. This isn’t a concern for many retirees and their families, but if there is a desire to keep a property in the family, then you should forgo a reverse mortgage.
You don’t want to pay the high fees and interest
Another negative associated with reverse mortgage are the costs and fees. Reverse mortgages require many of the same types of fees to be paid as traditional mortgages, but the amount of those fees can be substantially higher on reverse mortgages.
The interest rate on a reverse mortgage is typically higher than what you pay for a traditional mortgage. Also, most reverse mortgages use a variable or adjustable interest rate. This means the rate charged on your loan can rise or fall depending on economic factors outside of your control.
You can’t borrow enough to make it worth the expense
The amount you can borrow is determined by three factors: your age, the value and equity of your home and current interest rates. If you’re younger and still owe a significant amount on your home, then the amount you can borrow will be much less than if you are older and own your home free and clear.
Another factor that can limit how much you can borrow is if you are forced to set aside part of your proceeds to cover taxes and insurance. Failing to pay taxes and insurance is a cause of a loan default. To minimize that risk, lenders often require a portion of the loan’s principal limit to be set aside for those costs. That means less available to the borrower.
Also keep in mind that if you’re considering a reverse mortgage to receive a lump sum of cash, you’re typically limited to 60 percent of your principal limit in the first year of the loan.
You depend on certain public assistance programs
While a reverse mortgage will not affect Social Security or Medicare benefits, it can impact your eligibility for Medicaid or Supplemental Security Income (SSI). That’s because both of these programs have limits on the the income and assets a person can have to qualify.
Among the eligibility requirements for both programs, an individual must own $2,000 or less in assets at the end of each month. Married couples can own no more than $3,000 in assets at the end of a month to qualify. Your home and one car are exempt when calculating assets, meaning Medicaid and SSI does not count their value when determining your eligibility.
How a reverse mortgage can impact your eligibility is if you receive a lump sum cash payment that pushes your asset total above the $2,000 or $3,000 level. If at the end of the month you have more than that amount, you will lose your Medicaid or SSI eligibility.
Of course, it may be worth it to forfeit government benefits if the proceeds from the reverse mortgage provide needed cash that exceeds what those benefits are worth.
If, on the other hand, you need Medicaid to pay for health care costs, some experts advise people to spend their reverse mortgage proceeds before the end of the month. This is an option if you are planning to use reverse mortgage funds to pay a single large expense or debt.