When NOT to Consider a Reverse Mortgage
A reverse mortgage is a type of loan that allows homeowners ages 62 and older to convert part of the equity in their homes into cash - without selling the property, transferring the title, or making monthly payments on the loan. While these loans are advantageous to some seniors’ situations, reverse equity mortgages are not an appropriate option in some scenarios, largely because of the high upfront costs associated with the loan.
Reverse mortgage costs can be paid by using funds from the reverse mortgage loan. , reducing out-of-pocket expense for the senior; however, in certain circumstances the high fees make reverse mortgages excessively expensive option for freeing up equity in the property. A reverse mortgage might not be the best option if:
• The senior plans to move out of the property within two to three years, for instance to move into an assisted-living facility or a child’s residence
• The prospective borrower feels strongly about leaving their home to heirs. In many cases, the property is sold to repay the reverse mortgage balance. There are other options available for repaying the loan, including the use of private funds or refinancing, however, the property is often sold.
• The balance of the existing mortgage on the property exceeds the available funds from the reverse equity mortgage. While using the entire reverse mortgage loan to pay off the existing mortgage balance might seem counter-productive, one must also consider that the homeowner will no longer have to make monthly mortgage payments.
For some seniors, a reverse mortgage loan is not the best course of action. Other options to cash in on the equity in a property without taking out a reverse mortgage include:
1. A sale/lease-back or intra-family loan
2. Selling the property and moving into a less expensive home (be certain to factor closing costs, realtor commissions, and moving costs into price-comparison calculations)
3. A home equity line of credit (HELOC)