The way some financial advisers talk, you'd think reverse mortgages were never ever a good idea. But that's simply not true. In the right circumstances, they can provide a real lifeline to seniors facing challenging times or wanting a better lifestyle. And they may even form part of a sophisticated investment strategy. However, they do also come with some undeniable dangers, so it's vital to make sure one would be right for someone in your situation, and that you fully understand what you're getting yourself into. Learn more about these products at How Reverse Mortgage Works.
Here are a range of situations that improve the chances of a reverse mortgage (also known, when it's backed by the Federal Housing Administration (FHA), as a home equity conversion mortgage or HECM) suiting you. You probably need more than one of those situations to apply to you – and the more that do, the greater the possibility of your benefiting.
1. You're Older
You can't get a reverse mortgage at all until you've clocked up at least 62 years, but the older you are when you apply, the more money you're likely to get. That's because these products can work a bit like annuities, with the lender making a calculation centered on your life expectancy.
The older you are when you apply, the shorter your loan is likely to be. As importantly, if you opt to take some of your loan as a monthly income, the fewer months you're likely to be receiving payments. That allows the lenders' actuaries to authorize a higher loan and monthly check the older you are.
2. You're Not Going Anywhere
Although most or all the costs associated with setting up a reverse mortgage (RM/HECM) can usually be rolled up within the loan rather than paid up front, they are still considerable. Add to those the cumulative interest (in other words, you pay interest on the accumulated interest) that's mounting up in your account each month, and the total owed can soon be substantial.
Of course, the whole point of these products is that you won't have to pay a dime until you either move homes or die. But if you do move, perhaps to a long-term care facility, you may find the equity you have left in your home depleted. So if downsizing is on the cards, you may want to do that before you look at RMs/HECMs. You may even find the profit you make when you do so allows you to postpone further borrowing for some years.
3. You Have Plenty of Equity
The equity you have is simply the current market value of your home, less any loans that are secured on it. Usually, that's your mortgage and any home equity loans or home equity lines of credit you have. If you own your home outright, then your equity is 100 percent of your home's value.
Those with large existing mortgages might struggle to qualify for an RM/HECM. And, no matter what your current circumstances are, you won't be able to borrow all your equity. The maximum amount you personally can get will depend on a number of factors, including how much equity you have, the age of the youngest (usually younger) borrower, current mortgage rates and the outcome of an assessment of your finances. Get a quote to locate the right ballpark.
4. You or Your Kids Aren't Worried About Their Inheritance
There can be lots of reasons you're not bothered about your children inheriting your home: Maybe they're doing just fine already, maybe you're not close or maybe you never had kids in the first place. If none of those applies to you, you need to be aware of the possible impact of an RM/HECM on your estate.
All those costs and cumulative interest mean you're going to have much less equity in your home when you die – so the beneficiaries of your will are going to get that much less. It's your home, and you have every right to do with it what you will. Indeed, you may have little choice if your financial options are limited. But you may want to warn your kids of your RM/HECM plans so they know what to expect when the worst eventually happens.
By the way, your estate's liability is limited to the value of your home. So even if you live to be 120 years old, and the lender makes a huge loss on your loan, it can never come after you or your estate for any shortfall.
5. You're Prepared for the Last Roll of the Dice
Some people who are comfortably off use RMs/HECMs to keep up a pleasant lifestyle. But others with few assets beside their homes turn to them as a last resort, perhaps when they're finding other, more expensive debt unmanageable and want to pay it down, or when they need to boost their monthly incomes.
If you're in the second group, you must recognize that you're contemplating the last roll of your financial dice: Once you've released the equity in your home, you'll have no other worthwhile assets to tap to get you out of future trouble. In particular, you must be sure you have enough income for the rest of your life to cover property insurance and taxes. Your new RM/HECM can't be foreclosed on the grounds of your failing to make payments, because you don't have to make any. But it's a condition of your loan that you keep up with those insurance payments and property taxes. And people can – and do – face foreclosure because they've fallen behind on those.
That sounds scary, but thousands of RM/HECM borrowers have only good experiences with these products. You just have to fully understand all the implications and make sure one of these loans suits you before you sign up.
6. You've Thought of Your Partner
If you live with someone else (a wife, husband, life partner or friend) and you don't include him or her in your RM/HECM agreement, that person might have to move out or repay the loan when you relocate or die. The law keeps changing on this, but a real risk remains in some circumstances. So, if you want to be certain that person is protected, make sure they're on the agreement or that their right to continue to occupy the home after your death is guaranteed.
7. You're in a Bear Hug
Some financial advisers suggest than an RM/HECM is a good way to ride out a bear market. The idea is that such a loan gives you financial breathing space, and allows you to keep your stocks, shares and other investments when markets are depressed, letting you wait for their values to bounce back when the good times roll again.
Federal regulator of the Consumer Financial Protection Bureau doesn't like that idea, saying, "Be careful about taking out a reverse mortgage as part of an investment strategy. There is no such thing as a risk-free or guaranteed investment." Whose advice you take is up to you, and will likely depend on your appetite for risk.
8. You've Had Time to Think
It's rarely a good idea to make important financial decisions when you're desperate. So if you reckon you're going to need an RM/HECM in the next year or two, you might want to consider acting now.
That's not only because current mortgage rates are so low (although that helps), but also because it gives you the time to explore your options and the luxury of not being forced into a quick decision by circumstances. You can check out alternatives, such as home equity loans or refinancing, using mortgage calculators to directly compare costs and benefits.
If you eventually opt for an HECM backed by the FHA, you'll have to undergo a counseling session to make sure you know all the loan's implications. For a small fee, you can book your own session, even if you decide on a private reverse mortgage. That's a very good idea, and you can find a qualified and approved counselor through this U.S. Department of Housing and Urban Development web page.