A reverse mortgage has many advantages for seniors, but it also has some disadvantages. Professor emeritus Jack Guttentag at the Wharton School at the University of Pennsylvania, one of the premier business schools in the U.S., says of the government’s reverse mortgage program: “The Home Equity Conversion Mortgage program is well-designed and provides options for meeting a wide variety of retirees’ financial needs.” However, there are downsides for seniors who go the reverse mortgage route. Surviving spouses of reverse mortgage holders who are under 62, or whose name is not on the loan, may be liable for the total amount of the loan upon the death of their spouses. The U.S. Department of Housing and Urban Development (HUD) and the American Association of Retired Persons have been wrangling in court over these types of issues in recent years, in addition to other lawsuits that have been filed.
While it is not feasible to cover all the pluses and minuses of reverse mortgages here, it is useful to highlight a few prominent considerations.
- A reverse mortgage allows a senior to tap into the equity in his or her home without having to go through the ups and downs of selling the home.
- There is no need to have people traipsing through the living room and to keep the home spotless and uncluttered at most hours of the day because the home has been “staged” to look as if no one lives there. No home inspector comes to find fault. No realtor pressures the homeowner to lower the price because items like the cabinets, while in good condition, serviceable, and attractive, are not the latest fashion.
- A senior can stay in his or her home. Indeed, to qualify for a reverse mortgage, he or she must stay in the home.
- Applicants only have to be 62 to qualify.
- Applicants don’t have to weather any income or credit qualification process.
- The income received from reverse mortgages isn’t taxable.
- The loan is due only if the borrowers move or die, at which point a house sale would likely take place. The profits of the sale would be used to repay the loan with interest and any other accrued fees.
- A big plus is that if the house sells for less than what the homeowners owe on it, the lender takes the loss. If it sells for more, the money goes to the heirs.
- The loan can’t be outlived. That is, even if the owner lives for many decades, he or she will stay in the house as long as all financial obligations are met. The loan does not fall due until the homeowners die or have vacated the property for a full year.
These pluses are powerfully attractive. Now, let’s look at some drawbacks of reverse mortgages.
- A reverse mortgage is (as they say of some relationships) complicated. Reverse mortgages are extremely complex financial instruments. Many seniors shy away from them for this reason.
- There have been many defaults on reverse mortgages. They have pitfalls.
One major pitfall is that people take the pay-out in one big sum and invest or use it unwisely or burn through it before they die. The Department of Housing and Urban Development counsels people to take their pay-outs over a period of time, such as on a monthly basis, rather than in a lump sum. Many people do not heed that wise advice.
- A surviving spouse whose name is not on the loan may be held responsible for the balance of the loan or evicted (an issue that is being litigated) upon the death of the spouse who is the homeowner.
- Seniors still must pay property taxes and for all repairs and maintenance.
- Reverse mortgages are expensive–the interest rates are high compared to other kinds of loans.
- Having cash on hand might disqualify a senior from certain programs like Medicaid.
- The situation for heirs may be particularly complicated and should be examined closely.
Obtaining a reverse mortgage requires a careful consideration of the weight all the pluses and minuses carry for seniors who are considering them. Reverse mortgages are like any other financial instrument–they work for and benefit some people very well, but for others, they may cause more problems than they solve.
It is important that each person carefully consider his or her own situation and speak to disinterested financial advisors (not loan originators) to decide if a reverse mortgage is a wise solution.
AARP. Are Reverse Mortgages helpful? April 2013. Available online at http://www.aarp.org/money/credit-loans-debt/info-04-2013/are-reverse-mortgages-helpful.html.
Guttentag, Jack.‘Kosher’ Reverse Mortgages: Fixing a Dysfunctional Market. Knowledge at Wharton, August 27, 2015. Available online at http://knowledge.wharton.upenn.edu/article/kosher-hecms-fixing-a-dysfunctional-reverse-mortgage-market/.
Lawson, Karen. Reverse Mortgage Pros and Cons: What Homeowners Need to Know. Lending Tree. Available at https://www.lendingtree.com/reverse-mortgage/reverse-mortgage-pros-cons-article