Is a reverse mortgage appropriate?

If your loved one is worried about having enough money, he or she may be considering a reverse mortgage.

A reverse mortgage enables a homeowner to turn some of the equity in a home into cash. You might think of it as an advance payment on the accrued value of the home.

An approved lender will give your loved one money once a month, or in a lump sum. Interest is charged as the money is drawn against the house. When the borrower is no longer living in the house, the loan generally must be repaid. Usually this happens by selling the house.

A reverse mortgage may sound appealing, but it is a very complicated loan that should be considered carefully. Be sure you understand:

  • The reason for getting the loan. Counselors strongly advise against using it for living expenses. If the money is to pay for care—at home or in a facility—you should consult with a financial or legal professional to explore all payment options.
  • Cost of the loan. The loan origination fee on a reverse mortgage is high—usually 10% of the loan amount.
  • Taxes, insurance, and maintenance. Some lenders require that money be borrowed—with interest charged—and “set aside” to cover these expenses.
  • Surviving spouse. Once the primary borrower dies, or moves out—to a nursing home, for instance—the house may need to be sold to repay the mortgage. A surviving spouse may have to leave.
  • The mortgage must be paid back when the borrower dies. This may require that the heirs sell the house. Depending on how much is owed, there may be no money left from the sale.

Before your relative takes out a reverse mortgage, talk with a HUD-approved reverse mortgage (HECM) counselor. These professionals are free, or very low cost. Call 800-569-4287 for a referral