One of the main differences between a reverse mortgage and a regular home equity loan is that there is no income requirement. There are no loan payments, but you do have to keep paying property taxes and insurance. The loan is paid off when the home is sold, usually after the borrower dies.
In a perfect world, homeowners would borrow all the equity from the home, in small amounts, over a long period of time, having exactly what was needed to live on for the remainder of their life, and using up the equity just as they passed away. But it rarely works that way, and even if it does, reverse mortgages are a very costly option. Often, seniors take the cash out in a lump sum, using it up long before the end of their lives, and even defaulting on the tax and insurance payments, forcing the home into foreclosure.
Reverse mortgages are marketed aggressively to seniors. Lenders take advantage of the fact that seniors may have lots of equity in their home, but little or no income. Reverse mortgage lenders offer their products as the perfect answer, but fail to point out the numerous drawbacks, such as large up front fees in the form of mortgage insurance. While there are some newer, less expensive products, one should expect to pay 2% of the value of one’s home, no matter how much one borrows. Elderly homeowners, often with their backs to the wall financially, are routinely taken advantage of.
Because one still owns one’s home with a reverse mortgage, one can technically leave it to the heirs. But since the loan will have to be paid off by selling the home, reverse mortgages are not appropriate for people who want to pass the home to their heirs. Rather than encumbering the home with any kind of mortgage, it may make much more sense to sell it outright, downsize to an apartment, and invest the proceeds to create a stream of fixed income.
Borrowing with a reverse mortgage can be one of the biggest financial decisions of one’s life. It’s important not to make it based on what could be only a short-term cash crunch. Other options, including other sources of income, should be explored first, and one should seek advice from a professional — a CPA, a lawyer, or a trusted financial advisor who doesn’t stand to benefit from the reverse mortgage transaction.