As a reverse mortgage counselor I get that question all the time. Of course there is not a simple yes or no answer to the question because whether or not a reverse mortgage is a good fit really depends on the financial and lifestyle goals of the potential borrower. So I would want to have a conversation with my mother about what her needs and goals are. If my mom came to me and said “should I get a reverse mortgage?”, here are 3 questions I would ask her.
How long do you want to live in your home?
I would ask this question for 2 reasons. 1) If she wants to sell the home in the next year or two does she think the cost of the loan would be worth it short-term? 2) The big question is how long does she want to take care of the property, physically and financially? The thought of selling and moving can be daunting so in the immediate future it may seem easier to stay. However, maintaining a home can be physically taxing along with potentially costly maintenance and repairs. So I would want to talk about what it would look like to downsize to a low maintenance condo, townhouse, or a senior rental situation. For some, yard work and gardening is enjoyable and provides a sense of accomplishment and even exercise; for others it is just another painful chore. I would want to know if owning a home made my mother feel empowered or overwhelmed.
How does the budget look?
This can be an awkward conversation because not all parents are open about their personal finances. However, this a major factor in how well the reverse mortgage will meet the needs and goals of the borrower. The reverse mortgage can provide relief from financial stress by removing the obligation of a monthly mortgage payment or allowing access to equity to supplement income if needed or wanted, but it has limits because it only allows the borrower to use a portion of the equity. This is why meeting with a HUD-certified reverse mortgage (HECM) counselor is so critical. (Call LSS at 888.577.2227 if you or your parent(s) need the required HECM counseling.)
A HECM counselor is an objective party that doesn’t benefit either way whether or not a senior takes out a reverse mortgage. Not only will they go over the benefits and drawbacks of the reverse mortgage, but they will also go over the budget and do a benefits check up to make sure that the senior is getting all of the benefits that s/he is eligible for – which may also reduce expenses and supplement income. The counselor will discuss how much equity would be available to the borrower and the different payment options for accessing that equity. They are also required to cover alternatives to the reverse mortgage that the borrower may not be aware of. The counselor will also discuss the rights and responsibilities of the borrower with a reverse mortgage. As a daughter, I would offer to attend this counseling session with my mom if she would like me to.
Are you okay with giving up equity?
With a conventional or “forward” mortgage, you have a lien on your property. You make monthly payments that go toward the principal and interest to reduce your mortgage balance and increase your equity. The reverse mortgage is the opposite, you are not required to make payments so the interest and FHA mortgage insurance is being added on each month, causing your balance to go up and your equity to go down.
How much you draw from the reverse mortgage will impact how quickly the balance will grow. When you take out a reverse mortgage you will have access to a percentage of your home’s value and the remaining equity is eaten up by the growth of the balance over time. So if the borrower needs to sell and move down the road they will take less equity with them because the loan balance will need to be repaid. For some borrowers this is concerning, especially if they want to leave equity from the home to heirs or plan on buying another property with the proceeds of the sale. For others, not having a mortgage payment and/or having access to equity (if needed or wanted) far outweighs the loss of equity.
So these are the questions I would ask my mother that would hopefully allow us to have a good conversation about her short- and long-term goals. Ultimately the decision would be hers and answering these questions will help her make an informed decision.
If there is any credit card or other debt in the picture, it would be helpful to talk to a financial counselor about debt repayment options. A Debt Management Plan helps people pay off their debt faster and with less interest payments. To schedule your free debt counseling session, call LSS at 888.577.2227 or you can get started online.
Author Ashley Hagelin is a Certified Financial Counselor and she specializes in Reverse Mortgage (HECM) and Foreclosure Prevention counseling.