Although reverse mortgages can seem like an attractive way to fund ones retirement, be wary. There are many details hidden in the small print of the mortgages. For example:
- When the bank states that the home will remain yours, they mean it will remain yours as long as the individual who signed the mortgage contract resides in the home. If the person/persons who took out the mortgage leave the home to go to a nursing home, with no probability of returning to the home, the bank can and in most cases will, call the loan. This means that the individual will have to come up with the entire sum of the loan at once, plus interests and insurance fees (which the bank tacks on at very high rates), in order to keep their home.
- Once the individual who took out the loan dies, the bank will call the loan. This mean unless your family can come up with the entire sum as stated above, the bank will foreclose on the home. So, if the individual who signed the mortgage contract intended to leave the property to their children, spouse or, someone other than the bank, then they either need to have left enough money in the estate (from sources other than the remaining equity in the home) to pay off the entire sum owed the bank or forewarn those who stand to inherit that, unless they can come up with the entire sum owed the bank when the bank calls the loan, they will lose the house to foreclosure.
- Another issue that often arises is when only one spouse signs the mortgage contract. This can occur either because the home was separate property or because only one of the spouses qualified for the reverse mortgage (you have to be at least 65 to be able to qualify for a reverse mortgage). In this circumstance, when the signing spouse leaves the home to enter a nursing home with no probability of returning to the home or the signing spouse dies, the bank can and most likely will call the loan. Unless the surviving spouse can repay the entire sum, as mentioned above, then the bank will foreclose on the home.
- One final issue that often arises is when an individual or couple take out the reverse mortgage in order to pay for in home care and avoid going to the nursing home for as long as possible. In this situation, the money is usually used rather quickly, as in home care (especially 24 hour care) expenses can be very expensive and add up very quickly. Because of this, the individual or couple who took out the reverse mortgage are left with no money and no equity in their home. As they can no longer afford to pay to have home care and stay in their home, many individuals end up going into nursing homes. At this point, because they have spent down all of the money from the reverse mortgage, they are not able to afford the nursing home care and will need to rely on Medicaid to pay for their care. This means, most likely, that the individuals are not able to pick the type of care or the type of skilled nursing facility that they would have wanted if they were able to pay for the care themselves. They now must rely on the care and skilled nursing facilities covered by Medicaid. In addition to this, if there is any equity remaining in the home, then Medicaid is allowed to take a lien on that equity and recover money spent for care on the individual or couple once he or she dies.
Many individuals do not realize that these details are included in the mortgage contract that they are signing. Most banks will not bring these details to the attention of the signing party, because quite frankly, it is not in the banks best interest. Many individuals intend to leave their home and/or property to family (specifically, their children). If the signing individual realized what these details hidden in the small print mean, then many would not opt to take out a reverse mortgage.
But, for a few select individuals, a reverse mortgage can be an excellent tool for obtaining money to cover the many expenses in later life. These individuals are most likely individuals who do not have family that they wish to leave the home and/or property too or they simply choose not to leave the home and/or property to family and opt instead to use the money from the equity loan to spend on themselves.
Whatever the situation, if you are considering a reverse mortgage or know someone that is, I urge you to read all of the mortgage contract very closely and make sure you know exactly what details are hidden in the small print. If, upon this close reading and careful consideration, you still wish to proceed, then that certainly is your choice. I just want to make sure that everyone is aware of the typical issues and consequences that arise when taking out a reverse mortgage on home equity.