Why a reverse mortgage should be considered only as a last resort.
You may have read articles or seen television commercials touting the advantages of reverse mortgages. You may have even seen Tom Selleck, for those who watch Blue Bloods or remember Magnum PI, on your television asking whether a reverse a reverse mortgage is right for you. Although a reverse mortgage may be appropriate in certain situations, unless you are in dire need of cash or a monthly cash stream, I am generally not a proponent of a reverse mortgage. The reasons why will follow.
With a reverse mortgage, if you are at least 62 years old, you can borrow against the equity in your home to receive a lump sum of cash or a monthly amount. You don’t have to pay it back until you die or move out of your house. You still must stay current on you property taxes, insurance and any HOA fees. If you are in need of immediate cash or need to supplement your monthly income to pay your bills, this may be your only option. Also, if it means little to you what you leave at your death to your beneficiaries, this may be attractive to you.
The reason that I am not a big fan of reverse mortgages is that it will suck out the equity that you have built up in your home quickly. There are plenty of expenses associated with a reverse mortgage, and since you don’t make payments, all of these expenses will continue to accrue interest until you sell your home or die. There will be significant closing costs, origination fees and administrative expenses in setting up a reverse mortgage and when payments are made to you. Not only do you have to continue to pay your real estate taxes and homeowner’s insurance, you will have to pay a mortgage insurance premium with a reverse mortgage.
Equity will dwindle down to nothing.
All of these costs and whatever money you receive will continue to accrue interest until the entire amount is paid back. Although the lender cannot recover more money than what the house sells for when it is sold, when you die or if you need to sell your house, you may find that all of the equity that you have built up in your home has dwindled down to nothing. This will be a huge problem is you were planning on using the proceeds from the sale of your home for something else or were planning on leaving an inheritance for your children or other intended beneficiaries.
Like I said before, in limited situations, a reverse mortgage may be appropriate or even necessary. However, if there are other options, I would only resort to a reverse mortgage as a last resort. Click here to read the consumer advice written by the Federal Trade Commission about reverse mortgages.
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Joseph Balmer manages the Probate, Trust and Estate Administration department at Dayton, Ohio, law firm, Holzfaster, Cecil, McKnight & Mues, and has been certified by the Ohio State Bar Association as a specialist in Estate Planning, Trust and Probate Law since 2006.
