In a recent column, you provided advice to the relative of an underemployed person who owned a home free of mortgage but was in financial distress with inconsistent cash flow and was falling in arrears with their property taxes.
WpGet the full experience.Choose your planArrowRight
Wouldn’t a reverse mortgage work here, providing a consistent cash flow? What would be any possible downsides? Is there a minimum age requirement for reverse mortgages (since we don’t know the person’s age but who is probably, if not close to being, a senior citizen because the mortgage is paid off)?
Thank you for your comment. We aren’t huge fans of reverse mortgages, though they can be useful in some circ*mstances. Let’s walk through the issue and see if a reverse mortgage might work here.
If we assume the person seeking a reverse mortgage was 62 years old (the minimum age to get a reverse mortgage), and owned the home outright (or had a very small mortgage), that person might qualify for a reverse mortgage. But we’re not sure that taking money from the equity in the home to pay for her housing expenses would solve our reader’s problems, and that is often the best use for a reverse mortgage. For that reason, we suggested that our reader consider selling the home.
Reverse mortgages require a lot of forward thinking
While you are correct that our reader didn’t have a mortgage on the home, our reader appears to have accumulated some debt over time due to her inability to pay her living expenses. So the question is: Would it be worthwhile to get a reverse mortgage and use the proceeds to pay off her debt issues?
Since we don’t have exact numbers, let’s walk through a hypothetical situation. If we assume the home was worth around $100,000 and she had about $10,000 in debt to pay off, she might get about 50 percent of the home’s value through a reverse mortgage. She also might have paid $5,000 or more in fees to get that reverse mortgage (though this is generally built into the loan). With this scenario, she would take out $50,000 and use $10,000 to pay off her debt, leaving her with $40,000 in cash.
More Matters: Tax implications vary depending on how investment home was used
We were also told that she had accumulated the $10,000 in debt over the prior few years, so our reader with the reverse mortgage could expect to run out of money at the rate of her expenses within the next 10 or so years. That might have kept her in the home, but at the end of the 10 years she would have blown through half her equity in the home (assuming that the home appreciated a bit, but there’s interest tacked onto the reverse mortgage) and she would be around 75 years of age.
We thought it might be better for her to evaluate her living situation and make a decision to sell based on her current income and expenses. What happens if she lives to be 95? If she eats up half her equity but only gets 10 years out of it, what will happen after that? And she’ll still have home maintenance expenses, property taxes and insurance premiums to pay.
More Matters: How to save on income taxes when selling a home
Instead, imagine she sells the home and downsizes to something that’s more affordable based on her projected retirement income. She could invest the $100,000 she gets from the home and use it for some extras or for an emergency fund.
Given that the home seemed to be her largest expense, we thought it would be better for her to look at alternative living situations with the hope that she might find something to her liking but at a much lower monthly cost. At the same time, she’d have any money she had from the sale of the home in the bank.
Ilyce Glink is the creator of an 18-part webinar + ebook series called “The Intentional Investor: How to be wildly successful in real estate” as well as the author of many books on real estate. She also hosts the “Real Estate Minute” on her YouTube channel. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact them at ThinkGlink.com.
FAQs
If you're 62 and expect your current place to remain your forever home, a reverse mortgage could make sense. You need more money to manage everyday expenses – If you're struggling on a limited income, a reverse mortgage can help you keep up with some bills.
How do I know if a reverse mortgage is right for me? ›
If you're 62 and expect your current place to remain your forever home, a reverse mortgage could make sense. You need more money to manage everyday expenses – If you're struggling on a limited income, a reverse mortgage can help you keep up with some bills.
What is the 95% rule on a reverse mortgage? ›
This means your heirs can pay off the loan by selling the home for at least 95 percent of the home's appraised value. The rest of the loan is covered by the mortgage insurance that the reverse mortgage borrower paid during the duration of the loan.
Who is not a good candidate for a reverse mortgage? ›
Who is not a good candidate for a reverse mortgage? A reverse mortgage is a questionable proposition if you have sufficient income to pay your bills or are willing to sell your home to tap into the equity. If that's the case, it may make more sense to just sell it and downsize your home.
What is the biggest problem with reverse mortgage? ›
While a reverse mortgage lets you access your equity without selling your house right away, it can be financially risky: A reverse mortgage increases your debt and can use up your equity.
What is the rule of thumb for reverse mortgages? ›
One standard rule of thumb is that you need 50% equity in your home to qualify for a reverse mortgage. The U.S. Department of Housing and Urban Development (HUD) offers general guidance for equity requirements.
Who really benefits from a reverse mortgage? ›
A reverse mortgage is a loan for homeowners aged 62 and older who want to borrow against their home equity without having to make monthly payments. 1 This mortgage product can help seniors who are short on funds for living expenses.
What is 60% rule in reverse mortgage? ›
It is worth mentioning that all HECMs are subject to the 60% utilization rule. This limits the amount any reverse mortgage borrower can take in the first year to the higher of 60% of the principal limit or mandatory obligations like an existing mortgage plus 10% of the loan amount.
What does Suze Orman say about reverse mortgages? ›
Taking a loan too early
The earliest a homeowner is eligible to take out a reverse mortgage is age 62, but Orman considers it risky to do so. "If you tap all your home equity through a reverse at 62 and then at 72 you realize you can't really afford the home, you will have to sell the home," she said.
Can you lose your house with a reverse mortgage? ›
The problem, say advocates, is that many senior homeowners don't understand the fine print in a reverse mortgage. Some wrongly assume the lender will pay the taxes and insurance. But fall behind on those payments or fail to maintain the home, and the lender can foreclose.
A big downside to reverse mortgages is the loss of home equity. Because you're not paying down your reverse mortgage balance, you'll make less profit when you sell, or limit your borrowing power if you need a new loan. You'll pay high upfront fees.
What are better options than a reverse mortgage? ›
Alternatives to a reverse mortgage include home equity loan, home equity lines of credit, and cash-out refinances. These financial products can help you tap the equity in your home to use as cash for other purposes. Learn more about the pros and cons to different alternatives to a reverse mortgage.
What disqualifies you from getting a reverse mortgage? ›
Key Points. You might be disqualified from getting a reverse mortgage if you don't meet age requirements, are behind on other loans and payments, or don't have enough equity in the home.
Why are people disappointed with reverse mortgages? ›
Relatively High Fees
Real estate closing fees: As with a regular mortgage, reverse mortgages can rack up a variety of closing costs, including a home appraisal and inspection, title search, recording fees, mortgage taxes, and a credit check of the applicant, among others.
How many people lost their homes to reverse mortgages? ›
A USA TODAY review of government foreclosure data between 2013 and 2017 found that nearly 100,000 reverse mortgage loans have failed, burdening elderly borrowers and their families and causing property values in their neighborhoods to crater.
How much money do you actually get from a reverse mortgage? ›
The amount of money you can get from a reverse mortgage usually ranges from 40% to 60% of your home's appraised value. The older you are, the more you can receive because loan amounts are based on your age and current interest rates. Several factors determine the loan amount: The age of the youngest borrower.
What is the downside of getting a reverse mortgage? ›
A big downside to reverse mortgages is the loss of home equity. Because you're not paying down your reverse mortgage balance, you'll make less profit when you sell, or limit your borrowing power if you need a new loan. You'll pay high upfront fees.
Can I lose my home with a reverse mortgage? ›
Just like a traditional mortgage, with a HECM you are borrowing money and using your home as security for the loan. You must continue to pay for property taxes, homeowner's insurance, and make repairs needed to maintain your home or the lender can foreclose on the home.
