There are reasons why people don’t do a reverse mortgage. Here are 5 reasons and scenarios, from a reverse mortgage loan originator point of view, on when not to do a reverse mortgage or when it may not be a good fit for your scenario. A link to a brief video will provide more detail on these points.
But first, I see quite a few videos from money managers on YouTube with reasons why not to get a reverse mortgage. But the information being provided in these videos is many times out of date or incorrect. The recently added protections and new loan products featuring low fees and larger loan amounts are not being mentioned. If the maker of the video would have interviewed a seasoned reverse mortgage loan originator before making the video, it would have more beneficial for everyone.
Reason #1 – Needing funds for the short term.
A bank HELOC may give a better interest rate. But you have to have enough income to qualify to get it. Reverse mortgage income qualifying is by far more lenient. A bank HELOC lender can also close out the line of credit without notice due to a drop in home value. A HECM reverse mortgage line can not be closed for this reason also a bank HELOC requires monthly payments, a reverse mortgage does not.
Reason #2 – If you plan to rent out the house.
Reverse mortgages require the property to be the applicant’s owner-occupied residence. Renting out the property after obtaining a reverse mortgage can cause a maturity event and the lender can demand the loan to be paid off immediately. The video link provides when rental income is permissible.
Reason #3 – If you are living elsewhere for more than 6 months out of the calendar year.
This too would cause a maturity event. There is a different rule for this situation if you are in ill health. Please view the video link for more clarification on this issue.
Reason #4 – Promising children they can move into your home after getting a reverse mortgage.
After the last living borrowing no longer lives in the property as their owner-occupied home, the existing reverse mortgage must be paid off prior to anyone else moving into the property. The video link will expand on giving an example of how to remedy this situation.
Reason #5 – If you want to leave all your equity to your kids.
Since a reverse mortgage doesn’t require monthly mortgage payments to pay back the money, the mortgage interest accrued for that month that hasn’t been paid gets tacked onto the balance of the loan. This makes the mortgage balance go up over time. This translates to less equity for the heirs. Some parents will not do a reverse mortgage for this reason alone. It is a sweet and unselfish gesture on the parent’s part to leave as much equity as possible to their heirs. But should it come at the expense of living a subpar lifestyle and in some cases living hand to mouth? That is a topic for debate and is unique with each family dynamic. The video link goes over a scenario covering this issue.
Regardless if people don’t do a reverse mortgage, it’s important to understand a reverse mortgage can create a bucket of money, not invested in the stock market, for people over the age of 55 to dip into when needed and give peace of mind and comfort during retirement years. But it is also important to know some of the reasons when not to do a reverse mortgage or when it doesn’t fit your situation as well. Feel free to leave a question or comment below.
Best
KW