Should You Go Forward With a Reverse Mortgage?

Senior citizen considering a reverse mortgageWells Fargo and Bank of America have pulled out of the reverse mortgage market, but other companies are staying in, making it possible to get a reverse mortgage if it's right for you. Image: Rayes/Digital Vision/Getty Images

Big lenders in the reverse mortgage business — Wells Fargo this month and Bank of America earlier this year — have pulled out of the market and won’t issue any new reverse mortgages. But MetLife and several smaller companies plan to stay in the market, so you won’t have issues finding a reverse mortgage if you want one.

But should you take out a reverse mortgage? Only get one if you:

  • Have equity in your home and no way of paying the bills other than selling your home and living on the proceeds (because reverse mortgages have steep upfront fees).
  • Can pay the property taxes and home owners insurance bills from now until you die with or without the money you’re getting from the reverse mortgage. More on that later.

With a reverse mortgage, if you’re 62 or older, you get to cash out your equity (the bank keeps some as an insurance policy on the “loan”) and keep the house. The bank pays you the value of your house either in a lump sum, in fixed monthly payments, or gives you a line of equity, all of which are based on formulas taking into account your home’s appraised value, current interest rates, and the youngest applicant’s age. 

Because you don’t pay back a reverse mortgage, you don’t have to prove you have a future income the way you do with a regular mortgage — the reverse mortgage is your future income.

If you opt for the lump sum and spend it all, the bank can’t force you to move out. You get to stay until you die, or until you’re out of the house for a year, presumably in a rest home.

The catch: If you don’t pay your property taxes, the bank would have to pay them for you or foreclose before the tax man can sell your home to cover the taxes you owe.

If you don’t pay your insurance premiums, the bank can put an insurance policy on your house and then ask you to pay for it. But if you can’t pay the bill, the bank has to get permission from the U.S. Department of Housing and Urban Development, which backs reverse mortgages, to foreclose on you. And, so far, HUD hasn’t allowed any reverse mortgage foreclosures.

By the way, Wells Fargo has implied it’s leaving the market because HUD isn’t moving fast enough to come up with a financial assessment that would allow banks to turn down reverse mortgage borrowers who aren’t qualified and also solve the tax and insurance issues.

Are you a fit for a reverse mortgage?

Before you sign up for a reverse mortgage, do some budget projections to make sure you’ll be able to continue to pay your property taxes and insurance bills in the future.

If you know how much your home owners insurance and property taxes have risen in your town each year over the past 10 years, you can calculate how much they’ll be in 30 years. If, like me, you just know they always go up, but you’re not sure how much, you can use a general inflation calculator to estimate your costs out to 2070.

A reverse mortgage can be a blessing if your retirement income just isn’t going as far as your retirement costs. Getting to cash out your equity and not having to move truly is having your birthday cake and eating it, too, as long as you have enough cash to make sure you don’t outlive the party.

Would you take out a reverse mortgage to pay for home costs during your retirement?