SeniorTruth

Question: My wife and I are in our early 70s. We own our own home. Would a reverse mortgage make sense for us?

Answer: It depends. A reverse mortgage can be a valuable financial tool, providing needed funds to help you cover your living costs and allow you to stay in your home. Or it can be a costly financial mistake.

Background
For many older homeowners, home equity is their largest financial asset. A reverse mortgage can turn home equity into cash.

Reverse mortgages are adjustable-rate home loans that needn’t be repaid until borrowers die, move out, sell, or fail to comply with loan agreements (covering upkeep, taxes, insurance, etc.). The possible loan amount depends on the owner’s age and the home’s value.

All owners must be at least 62 years old. There can be a small existing mortgage on the home - which will be paid off as part of the reverse mortgage.

You can take loan proceeds as a lump-sum, a series of monthly payments, or a credit line which you draw on as needed. Combinations are possible.

Cautions

• Reverse mortgages can be very expensive. Look at other alternatives (including selling and moving, home-equity loans or using public benefits).
• One mortgage can be much more expensive than another - you must shop around.
• Given their relatively large upfront costs, reverse mortgages are extremely costly money for anyone who can only stay in the home a short time. A rough rule of thumb: Can you stay at home at least five years?
• We join AARP and others when they warn against doing business with anyone who tries to sell a reverse mortgage to raise funds to purchase annuities or other investments, insurance, or other products or services.

A checklist
I suggest that a married couple not only heed the above cautions, but make sure that all of the following conditions apply before they sign up for a reverse mortgage:
[ ] Their home is a good long-term location for them (a safe layout, in a supportive neighborhood, etc.).
[ ] At least one spouse will be able to remain in the home for at least five years.
[ ] There is a gap between their ongoing monthly living costs and their monthly income - they need more income to close the gap.
[ ] They would not qualify for government benefits to close the gap.
[ ] They will take the proceeds as a series of monthly payments or a credit line - and in either case the amount will fully close the gap.
[ ] They have talked with their family about the reverse mortgage - both the reasons they are considering it, and the consequences of the borrowing.
[ ] They have carefully examined the reverse mortgage as part of their overall financial picture (savings, income, debts, etc.), and their living arrangements and goals.
[ ] They have reviewed their entire picture with an experienced and capable financial advisor (not the reverse mortgage salesperson or the mandated counseling agency).
[ ] They understand the deal, and have shopped well to compare both up-front and ongoing costs.

More information
The best consumer information we’ve seen on reverse mortgages is from AARP (www.aarp.org/money/revmort/). Download AARP’s free booklet Home Made Money, order it online or call 800-209-8085. Among other things, the AARP website can help determine whether selling a home makes more sense than a reverse mortgage.