Reverse Mortgages: Good Idea or Not?

As a former mortgage and credit specialist at Merrill Lynch, I often encountered questions about reverse mortgages. While it's not an endeavor that Merrill was involved in, people saw me as a professional that could answer their questions. It required me to take a good hard look at the reverse mortgage industry, and what I found may surprise you--or it may not. Let's tackle reverse mortgages and the decision to take one on or not one step at a time.

What is a reverse mortgage?
A reverse mortgage works like it sounds. Instead of a borrower making mortgage payments, a reverse mortgage makes payments to the homeowner. There are several conditions that have to be met for a homeowner to be eligible for a reverse mortgage--being 62 years or older, owning a home a free and clear of any tax liens, owning a home with sufficient equity to pay you for the rest of your life, etc.

How does a reverse mortgage work?
When the homeowner meets the criteria of the reverse mortgage company, they have the choice of receiving the mortgage payments as a lump sum or in monthly installments. The amount of the reverse mortgage may vary from borrower to borrower since it is based on the amount of equity in the home, the age of the borrower, current interest rates, etc.

What happens when the homeowner dies or moves?
Most people believe that when the reverse mortgage holder dies or moves out of the home that the mortgage company takes ownership of the home. In reality, the homeowner or the estate of the homeowner can choose to repay the reverse mortgage, plus interest and finance charges to pay off the balance of the mortgage and retain ownership of the property. The home can also be sold to repay this amount. Any excess funds go to the homeowner or estate of the homeowner. On the other hand, if the home sells for less than the amount of the mortgage, then the shortfall has to be covered by the homeowner or the homeowner's estate.


Is a reverse mortgage right for you?
Financial decisions are personal decisions. What may be right for you, may not be right for the next Joe Homeowner that comes along. Deciding whether a reverse mortgage is the right choice for you is personal. Do you have heirs that you want to leave the home to? Do you need income to live on? What are your plans for the rest of your life? How old are you? What are your other sources of income?

For some people, it is the right choice to take out a reverse mortgage, while for others it may not make financial sense. You should, however, discuss the options with a mortgage company that offers reverse mortgages, your financial advisor, and your tax consultant before making a final decision as to whether or not it's the right choice for you.

Reverse mortgage information
Wells Fargo
National Reverse Mortgage Lenders Association
National Association of Mortgage Brokers