When is a reverse mortgage a bad idea?
There are six situations when a reverse mortgage is not a good idea.
Short-term needs
If you only need the money for a short period of time and then can repay the full balance, a home equity loan would probably be a better fit. A reverse mortgage is for homeowners who don't have the means to pay back the money they receive. Since home equity loans often don't have any closing costs but reverse mortgages do have closing costs, only consider a reverse mortgage for long-term needs.
Spouse not on title
If the title to your home is only in your name but your spouse is still living with you, you should add your spouse onto the title.
A reverse mortgage must be repaid when the last person on the title moves out of the property permanently or passes away. So, if you were to pass away before your spouse and your spouse was not on title, the reverse mortgage would become due even though your spouse is still living in the property.
Don't need the money
If you don't need the money right away, don't rush to take out a reverse mortgage. The interest on a reverse mortgage is low but it's definitely not free money. If you have other funds that you can use such as CDs or savings accounts, use those before getting a reverse mortgage.
Risky investments
If you are being encouraged to get a reverse mortgage so that you can use the money to invest in stocks, start-up companies, real-estate, or any other type of investment, you should take a good hard look at what the person encouraging you stands to gain. Chances are they're asking you to take big financial risks at a time in your life when you should be conservative. If your home is your only asset, don't risk it.
Annuities
Unethical life insurance salesmen sometimes encourage homeowners to take out a reverse mortgage and then try to sell the homeowner an annuity. That is wasteful because the reverse mortgage has a built-in annuity feature called "term" or "tenure" payments that you can use to save yourself the commission that the insurance agent would like to make. So if the person encouraging you to get a reverse mortgage also brings up annuities, be suspicious.
Very low property value
On low-value homes, the closing costs will be a higher percentage of the home's equity compared to the same loan on a higher-priced home. For example, if the miscellaneous closing costs such as appraisal, title, and notary are $1,000 on a $100,000 home then that represents 1% of the home's value. However, on a $40,000 home that represents 2.5% of the home value. Consequently, seniors with low-value homes should look closely at the closing costs as a percentage of their home's equity.
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