What should I think about before applying for a reverse mortgage?
There are a lot of factors to consider before you think about applying for a reverse mortgage. Ask yourself these eight questions.
It’s usually a good idea to discuss important financial decisions with friends, family, or someone you trust. Here are some questions to consider before applying for a reverse mortgage:
Note: This webpage has information about Home Equity Conversion Mortgages (HECMs), which are the most common type of reverse mortgage. The Federal Housing Administration (FHA), a part of the Department of Housing and Urban Development (HUD), insures HECMs.
1. Is there another, cheaper way for you to achieve your financial goal?
Before tapping into your home equity, see if you can find a way to lower your expenses. If you need extra money to cover living expenses, see if you qualify for a state or local program to lower your bills. You might also consider downsizing to a more affordable home.
2. Do you need to tap into your home equity now or should you save it for an emergency?
Home equity is often the last resource to turn to in a financial emergency. It is usually best to preserve your equity if you have other resources to meet financial needs.
As stated earlier, most reverse mortgages are HECMs. If you think you may need to access your equity, speak with a HUD-approved counselor and a trusted financial adviser now, rather than later. A financial plan will help you avoid last minute financial decisions in an emergency.
3. Are you on a fixed income with no other assets?
If you don’t have much income, a reverse mortgage might not be the best option for you. If you take out a reverse mortgage loan and then have trouble paying your property taxes and homeowner’s insurance, or the costs of repairs needed to maintain your home, you could face foreclosure. Instead of taking out a reverse mortgage in this circumstance, another option might be to downsize. If you sell your home and use money from the sale to buy a more affordable one, you could be more financially secure in the long run.
4. Do you have children or other heirs to whom you plan to leave your home?
Taking out a reverse mortgage can jeopardize your ability to leave your home to your heirs. If this is a priority for you, think twice about a reverse mortgage.
5. How long do you and your family plan to live in the home?
In most cases, a reverse mortgage makes more sense if you plan to live in your current home for a long time. Reverse mortgages can be an expensive way to borrow money if you don’t plan to stay in your home for many years. Here’s why:
Most reverse mortgages require you to pay insurance premiums. The insurance is there in case your loan balance grows to be more than your home is worth. With insurance, you won’t have to pay the difference. But, if you only stay in your home for a short period of time, chances are you are paying for insurance you don’t need. If you only plan to stay in your home for a short period of time, the loan balance is less likely to grow to more than your home value.
Reverse mortgages can also have higher interest rates when compared to other mortgage loans you may have had experience with, and higher upfront costs. If you sell your house within a few years, you won’t have gotten as much benefit from those costs as if you stayed in your home for a longer time.
6. Does your spouse want to keep living in the house if you die?
Discuss this question carefully with your spouse. If your spouse is a co-borrower and one of you dies or no longer lives in the home (for example, one of you moves to a nursing home), the other spouse will be able to keep living in the house and continue to get money from the reverse mortgage.
Sometimes, one spouse may not yet be 62, and can’t qualify as a co-borrower. A non-borrowing spouse may be able to remain in the home after the borrowing spouse dies if they qualify as an “eligible non-borrowing spouse.”
Note: This benefit does not apply if the borrowing spouse no longer occupies the house for reasons other than death. For example, if the borrowing spouse moved to a nursing home or other healthcare facility for more than 12 consecutive months or no longer lives in the home for the majority of the year for a non-medical reason, the non-borrowing spouse does not qualify to stay in the home.
7. How much will it cost you in fees to get a reverse mortgage?
Fees vary depending on the type of reverse mortgage that you choose. Fees and other charges can be high in some cases, so it is important to shop around for the best deal.
8. How will you pay for property taxes, homeowner's insurance, and necessary home repairs?
It’s important to have a plan for how you will pay for property taxes and homeowner’s insurance, and the cost of repairs needed to maintain your home. If you fall behind on these expenses, the lender could foreclose on your reverse mortgage and you could be forced to move.
Since 2015, when you apply for a HECM, the most common type of reverse mortgage, the lender will do a financial assessment at the time of application to help determine your ability to pay taxes and insurance from retirement income or savings. If you do not have enough other resources, the lender may set aside some of the reverse mortgage proceeds to pay these expenses in the future. A “set-aside” is a portion of your loan that is reserved to pay some property charges, homeowner’s insurance, and fees.
Set-asides help make sure you’ll have the funds to make these payments in the future. But be aware that you could face foreclosure if you run out of money to pay property taxes, insurance, or costs for repairs needed to maintain your home, even if you have a set-aside account.
If you or your parents are considering a reverse mortgage, make sure you get all the facts first. We have several resources to help you learn more about reverse mortgages. Check out:
- Reverse Mortgages: a discussion guide from the CFPB’s Office for Older Americans
- Answers to common questions about reverse mortgages
- A video for an overview of reverse mortgages
Talk to a HUD-approved reverse mortgage (HECM) counselor. Visit HUD's counselor search page or call HUD's housing counselor referral line at (800) 569-4287.