Motley Idiot: Defining When a Reverse Mortgage is a Good or Dangerous Thought
A reverse mortgage is a complex financial instrument that should only be used once a borrower fully understands the potential impact of such a loan on their life. This idea is a common part of reverse mortgage product training and a borrower will find additional clarity about this by speaking with a loan officer or reverse mortgage advisor.
However, there are certain situations that could result in a reverse mortgage being inherently good or bad for a person.
“Relatively young homeowners should be careful when choosing a reverse mortgage,” the column says. “You have to be at least 62 years old to qualify, but even that may be too young for some. If you outgrow your repayment term and cannot repay the debt, you can lose your home and have to move. A reverse mortgage can also be a bad idea if you care about leaving more wealth to your heirs. The credit balance, including interest, might leave little to nothing for them to inherit from that particular asset. “
The column also cautions against taking a reverse mortgage on the name of just one spouse in a married couple, which can make the process of the other spouse unnecessarily difficult if the other spouse wishes to remain at the home after the death of the “borrowing” spouse.
“If the loan a [Home Equity Conversion Mortgage (HECM)], a qualified surviving spouse can stay in the home, ”reads the column. “To qualify, the spouses must have been married when the loan was signed and meet other criteria. Even if the surviving spouse is allowed to stay in the home, the lender will no longer release money and the loan will not have to be repaid until the surviving spouse moves, sold, or dies. With other types of reverse mortgage loans, if the borrower dies, the lender may be able to terminate the loan, forcing the surviving spouse to move.
To find out when a reverse mortgage can be a good idea for a particular borrower, the column lists four basic criteria: whether the homeowner has a lot of equity or whether the original mortgage is paid off; if the borrower wants or needs additional cash each month; if the borrower does not expect to live in the home for longer than the loan term; or when the borrower understands how a reverse mortgage can affect the home as a legacy of an heir.
“Reverse mortgages have their value in the right circumstances,” the column says. “Just find out how a reverse mortgage will affect your finances – and your family – before you sign on the dotted line.”
Read the column in the Motley Fool.