A Reverse Mortgage Should Be A Last Resort… To What?

A Reverse Mortgage Should Not Be A Last ResortSo called senior advocates often state a reverse mortgage should be a last resort.  My question is to what?

A Home Equity Loan?  To qualify for a home equity loan or a traditional loan a lender looks at a borrowers’ credit, income, assets, and ability to make payments.  Most seniors don’t qualify for a home equity loan.

Even if a senior does qualify now, if “life happens” and they have to juggle making a mortgage payment or having funds for other expenses, their stress level increases.  And if they don’t make their mortgage payments they could be facing foreclosure.

I receive calls on a regular basis from seniors who did a home equity loan or traditional loan just a few years ago and now they can’t afford the payments.  When I run the calculations more times than not I find there are not enough proceeds from the reverse mortgage to pay off their current mortgage, a requirement of the reverse mortgage, mainly due to lower home values.  But could also be due to the reverse mortgage qualifying factors:

  • the amount one qualifies for with a reverse mortgage is determined by the age of the youngest borrower (the older one is the more one will receive)
  • the home value (determined by a FHA appraisal)
  • the Expected Interest Rate of the program chosen (the higher the interest rate above the 5% FHA floor, the less funds are available)

A combination of these factors could mean there are not enough funds to pay off a current mortgage at a later date.  For example, even though one is older in three or four years, the interest rate could be higher and the home value lower meaning less funds available.

The reverse mortgage as a “last resort” to a home equity loan or traditional mortgage is not generally a wise decision – one could have larger issues in the future.

A last resort to selling and moving?  The time it takes to sell the lower home values, the real estate costs and moving costs can be prohibitive for selling and moving to be a better option to a reverse mortgage.  In addition most seniors want to stay in their home.  See comparisons of costs in my article, “I Want To Stay in My Home – Don’t Tell Me To Sell!” and “Be Educated About Your Options Of Care And Financing The Care.

A Loan from a family member or friend?  Or help from a family member?  Is there someone who can and is willing to help financially?  What happens if “life happens” to them, i.e they lose their job or have health problems?  This could negatively impact finances for everyone, cause stress for everyone and impact relationships.  Again, generally not a better option to a reverse mortgage.

Skimping on necessities?  “Getting by” without a reverse mortgage?  Doing without to preserve equity for what may be future needs or to leave an inheritance for heirs?  Living from Social Security check to Social Security check just to get by and maybe doing without some of the things in life that give us dignity such as having lunch with friends, getting one’s hair done, or having cable TV… is this really a good option over a reverse mortgage?  Why should one be warned off a reverse mortgage rather than living life comfortably?  Or as Ed, a reverse mortgage borrower stated, “the reverse mortgage gives us some elbow room.”

Not having debt but waiting, saving the equity?  Why attempt to preserve equity from one’s home for the future or as an inheritance for heirs?  For what?  Why shouldn’t one enjoy the extra luxuries in life such as buying a car, taking a dream vacation having funds to attend a family reunion or wedding?  A reverse mortgage could help one remain independent, protect other assets, have security knowing one has funds for what one needs or wants as well as have control and choices of one’s lifestyle.Reverse Mortgage is a finance option

As a senior advocate myself, I help seniors review all their options and educate them on the reverse mortgage so they can make an informed decision and the choice of what best fits their needs.

A true senior advocate will stop stating a reverse mortgage should be a last resort and see that in the big picture the reverse mortgage is generally the best solution sooner than later.  At least it should be reviewed as a valid option for seniors.  And then let the senior make their own personal decision.

My question remains, a reverse mortgage should be a last resort to what?  Mary and Larry, who did a reverse mortgage, stated, “A last resort?  When one is retired it is the last resort.  Our reverse mortgage has been wonderful to meet our needs and maintain our lifestyle.”

© 2011 Beth Paterson. Beth’s Reverse Mortgage Blog, 651-762-9648

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