For those who are interested in opening a reverse mortgage, there are five specific scenarios when another solution might be a better idea, a recent Forbes column states.
In her latest piece “5 Times Reverse Mortgages are a Bad Idea,” Forbes contributor Tara Mastroeni offers some caveats borrowers need to be aware of before opening a Home Equity Conversion Mortgage. She begins by writing why she thinks those with worsening health should probably look for an alternative, explaining that leaving the home for more than 12 months can render their loan due and payable.
“If you or your spouse encounter a medical problem, especially one that requires extended rehab or nursing home care, you could risk not having a home to go back to at the end of your treatment,” she writes. “That, or you’ll have to pony up repayment on the loan at a time when you’ll likely need your disposable income the most.”
Mastroeni also covers the issues of non-borrowing spouses. For borrowers who choose not to include a younger spouse on the loan — in order to receive a bigger payout — but do intend for them to live there after the borrower passes, a reverse mortgage needs to be handled with care.
“In this case, if you want your surviving spouse to be able to keep the home, you need to make sure to put both of your names on the loan, even if it means receiving a smaller payout initially,” she says.
For borrowers who want their home to go to their heirs, Mastroeni suggests looking at other sources of income. When the borrower dies, and the loan needs to be repaid, heirs can become stuck with the bill if there aren’t enough funds elsewhere in the borrower’s estate.
“Plus, due to the extra complications in dealing with a reverse mortgage, they may not be able to qualify for a regular mortgage to absorb the cost,” she writes. “At that point, they’d have to choose between pulling the funds together to pay off the entire loan or letting the house be foreclosed upon.”
She goes on to explain all of the costs associated with the loan, confirming that although it does provide funds, it does have upfront costs and ongoing insurance fees. For those who might not be financially prepared for this, she suggests looking beyond the reverse mortgage.
Finally, she writes that anyone who receives certain supplemental government benefits should be aware that they will have to spend their reverse mortgage proceeds immediately, or incoming reverse mortgage funds could affect the income requirements for these benefits.
“However, if you receive supplementary benefits like Medicaid or Supplemental Security Income, know that you’ll have to spend the entirety of your reverse mortgage proceeds immediately,” she writes. “Any income that you retain at the end of the month will be counted as an asset, which could impact your eligibility.”
Read the full story on Forbes.
RMD wishes to clarify that the author referred to supplemental government benefits only. RMD regrets any error or confusion.
Written by Maggie Callahan