Questions one should ask before getting a reverse mortgage

Older homeowners aged 62 and older are sitting on a mountain of equity. Over $11 trillion dollars according to the National Reverse Mortgage Lenders Association’s Risk-Span Reverse Mortgage Market Index.

With seniors awash in home equity is this a good time for older homeowners to tap into their home’s value? With home prices on average up 42% since the pandemic and the housing market showing signs of a reset or even a crash, the use of equity is a decision that should be approached with full consideration of the risks and benefits.

What considerations should be weighed before tapping into one’s home with a reverse mortgage? Here are just a few, and as always, homeowners should seek the advice of a trusted professional and work with an experienced and skilled originator.

Questions to ask before getting a reverse mortgage

Will there be a future need for equity at the end of the reverse mortgage?

If equity is needed to move into another home or obtain long-term care and that equity is the only means of paying those expenses, then a reverse mortgage may not be right the best choice. With most reverse mortgage borrowers not opting to make voluntary payments the loan’s balance increases each month with interest charged and insurance being added to each month’s balance. 

Is a move likely in the next 5 years?

If a move is in the works or highly likely, then the costs of the reverse mortgage should be closely examined. The longer a homeowner lives with their reverse mortgage the lower their loan’s total annual costs would be since closing costs, upfront FHA insurance, and other fees are financed into the loan.

10 times when it may be a good time to get a reverse mortgage

  1. When the homeowner intends to live in the home for the foreseeable future.
  2. If there’s no strong desire to leave the property or its equity for their heirs.
  3. If there’s a significant and practical need for monthly cash flow without having to sell stocks or other assets at a loss.
  4. When the homeowner wishes to secure a line of credit * for unforeseen contingencies in the future and have the peace of mind that the line of credit will not be frozen when home values fall. * This only applies to the federally-insured Home Equity Conversion Mortgage (HECM) that’s administered by the Federal Housing Administration.
  5. When inflation has increased monthly retirement withdrawals that significantly reduce the number of years a retirement nest egg will last. (Sustainable withdrawals).
  6. When the homeowner wishes to secure access to a portion of their home’s value at its present appraised value instead of when the price of the home has fallen in a down market.
  7. When a reverse mortgage is part of one’s overall retirement plan created by a financial professional.
  8. When the elimination of required monthly payments by refinancing a traditional mortgage into a reverse provides a bonafide economic benefit that outweighs other risks.
  9. When a slightly higher interest rate would disqualify a homeowner who is already considering a reverse mortgage.
  10. When a reduction in the home’s value would disqualify the homeowner who has already considered taking the loan.

With home values at record highs and interest rates still below market norms, older homeowners should at least consider the benefits of a reverse mortgage before higher interest rates and lower home values may prevent them from qualifying for the loan. 

by Shannon Hicks August 22, 2022