A reverse mortgage is a complex financial instrument that should only be used after a borrower fully understands the potential impact that such a loan might have on their lives. This idea is a common component of reverse mortgage product education, and a borrower will gain additional clarity on exactly that in conversations with a loan officer or reverse mortgage counselor.
There are certain situations that might lend themselves to the idea of a reverse mortgage being inherently good or bad for an individual, however, and determining when the product might be considered one or the other was the topic of a recent column published by the Motley Fool.
“Relatively young homeowners should make the decision to get a reverse mortgage carefully,” the column reads. “You have to be at least 62 to qualify, but even that may be too young for some. If you outlive your loan term and you can’t afford to repay the debt, you could lose your home and have to move. A reverse mortgage may also be a bad idea if leaving more assets to your heirs is important to you. The loan balance, including interest, could leave them little to nothing to inherit from this particular asset.”
The column also warns about taking out a reverse mortgage in the name of only one spouse in a married couple, which can needlessly complicate the process of the other spouse if they wish to remain in the home after the “borrowing” spouse passes away.
“If the loan is a [Home Equity Conversion Mortgage (HECM)], a qualified surviving spouse can remain in the home,” the column reads. “To qualify, the spouses must have been married when the loan was signed and satisfy other criteria. Even if the surviving spouse is allowed to stay in the home, the lender won’t release any more money and the loan won’t have to be paid back until the surviving spouse moves, sells, or dies. For other types of reverse mortgage loans, the lender might be allowed to call the loan due on the borrower’s death, forcing the surviving spouse to move.”
In terms of discovering when a reverse mortgage may be a good idea for a particular borrower, the column points out four basic criteria: if the homeowner has a lot of equity or if the original mortgage is paid off; if the borrower wants or needs additional cash every month; if the borrower doesn’t expect to live in the home longer than the loan term; or if the borrower understands how a reverse mortgage can affect the home as a bequest asset to an heir.
“Reverse mortgages have their value, in the right circumstances,” the column says. “Just be sure to research how a reverse mortgage will affect your finances – and your family – before you sign on the dotted line.”
Read the column at the Motley Fool.