Five Questions to Ask Before Considering a Reverse Mortgage

AARP Washington

Until recently, there were two main ways to get cash from your home: you could sell your home, but then you would have to move; or you could borrow against your home, but then you would have to make monthly loan repayments.

Now there is a third way of getting money from your home that does not require you to leave it or to make regular loan payments.

A "reverse mortgage" is a loan against your home that you do not have to pay back for as long as you live there.  It can be paid to you all at once, as a regular monthly advance, or at times and in amounts that you choose. You pay the money back plus interest when you die, sell your home, or permanently move out. To be eligible for most reverse mortgages, you must own your home and be 62 years of age or older.

AARP does not endorse any reverse mortgage lender or product, but wants you to have the information you need to make an informed decision about these loans and other, less costly, alternatives.

Before making a decision about a reverse mortgage, AARP recommends you consider the following five points:

1. Do you really need a reverse mortgage? Start by assessing honestly why it is that you are interested in a reverse mortgage. If you want some cash to take that dream vacation, a reverse mortgage is an expensive way to pay for it. Taking out a pricey loan to make investments or to purchase insurance products is also not a good idea. Make sure that the needs you want to address are really worth the costs. If anyone is trying to sell you something and recommending you use a reverse mortgage to pay for it, that's generally a good sign that you don't need it and shouldn't be buying it.
   
   
2. Do you have less costly options? Do you have other financial resources that you could use before taking out a loan? If you could easily make the monthly repayments on a home equity loan or home equity line-of-credit, these alternatives are less costly than a reverse mortgage. Many state and local governments offer low-cost loan or grant programs that can be used to pay your property taxes or make home repairs. Have you looked into the costs and benefits of selling your home and moving to a less expensive one?
   
   
3. Can you afford a reverse mortgage? These loans are expensive, and the amount you owe grows larger at an ever increasing rate. The younger you are when you take out a reverse mortgage, the longer compound interest will grow, and the more you will owe. On the other hand, due to high up-front costs, these loans can be especially costly if you sell and move just a few years after taking one out.
   
   
4. Can you afford to start using up your home equity now? The more you use now, the less you will have later when you may need it more, for example, to pay for future emergencies, health care needs, or everyday living expenses, if your current needs grow or your income does not keep pace with inflation. Or you may need your equity to finance major home repairs or a move to assisted living. If you are not facing a financial emergency, then consider postponing a reverse mortgage. Homeowners who wait have "a reasonable expectation of securing a better product at a lower cost in the not-too-distant future," according to a report by the Fidelity Research Institute.
   
   
5. Do you fully understand how these loans work? Reverse mortgages are quite different from any other loans, and the risks to borrowers are unique. Before considering one, you need to do your homework carefully and thoroughly. 

A great place to start your research is on AARP's website at www.aarp.org/revmort. AARP also offers the free publication, "Home Made Money: A Consumer's Guide to Reverse Mortgages." Consumers can order one, single free copy of the booklet by calling AARP toll-free at 1-800-646-2283.  You can also read or download the publication online at www.aarp.org/revmort.

Homeowners aged 62 and over can also get reverse mortgage counseling for federally insured Home Equity Conversion Mortgages (HECMs) through a national network of HECM counselors approved by the U. S. Department of Housing and Urban Development (HUD). Visit the website for a list of HUD National HECM Network Counselors.