How do I know if a reverse mortgage is a good idea for me? What should I consider before applying?
Answer: There are a lot of factors to consider before you consider applying for a reverse mortgage. One factor is how much it will cost.
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:
- 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.
- 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. However, if you think you may need to access your equity, speak with a housing counselor and a trusted financial adviser now, rather than later. A financial plan will help you avoid last minute financial decisions in an emergency.
- 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, you could face foreclosure. 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.
- 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.
- 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 high upfront costs. If you sell your house within a few years, you won’t have gotten as much benefit from those costs than if you stayed in your home for a longer time.
- How much will it cost you in fees to obtain 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.
- How will you pay for property taxes and homeowner's insurance?
It’s important to have a plan for how you will pay for property taxes and homeowner’s insurance. If you fall behind on either one, the lender could foreclose on your reverse mortgage and you could be forced to move.
- Does your spouse or partner want to keep living in the house if you die?
Discuss this question carefully with your partner. If you take out a reverse mortgage without your partner as a co-borrower, then your partner will have to move out or repay the loan if you die. If your partner is a co-borrower, both you and your partner will be able to keep living in the house after one of you dies.
Talk to a housing counselor who’s been approved by the Department of Housing and Urban Development (HUD). Visit HUD's counselor search page or call HUD’s housing counselor referral line (800) 569-4287. HUD-approved counselors may charge a fee, typically $125 or less.
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. It’s usually a very bad idea to borrow against your home to invest in stocks, bonds or other financial products. All investments can lose value. That means you could risk losing your home, especially if you experience a financial shock if a loss to your investments makes it hard for you to keep up with your expenses.
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