Questions to Ask Before Taking a Reverse Mortgage

Reverse mortgages are complex loans typically available only to homeowners older than 61. They permit owners to borrow against their houses, but they do not require loan repayment until the borrower moves out of the home or dies. Then the loan is repaid from the proceeds of selling the house.

Skip to next paragraph Related Times Topics: Mortgages and the Markets

Here are some questions that financial advisers and groups like AARP, formerly known as the American Association of Retired Persons, say potential borrowers should ask before taking out a reverse mortgage:

1. Is a reverse mortgage the best option? Reverse mortgages can be very expensive compared with other kinds of loans, and the amount owed grows every month. Because of these high costs, someone borrowing only a small amount for a short time is probably better served with another kind of loan, like a home equity line of credit.

If borrowers need a large amount, they should consider alternatives to a reverse mortgage. For instance, does it make more sense to sell your house and rent or live off the proceeds after moving to a less-expensive home?

2. How long do you expect to stay in your house? Because the fees associated with a reverse mortgage are high, such loans make sense only for borrowers who expect to live in their home for a number of years. Some financial advisers say anyone who may move in less than seven years should not take out a reverse mortgage.

3. Do you want to leave your children an inheritance? Because repayment of a reverse mortgage is deferred until the homeowner moves or dies, the amount owed increases over time. If a borrower lives in the home for many years after getting a reverse mortgage, the debt can grow to equal the entire value of the house, meaning heirs will not receive anything.

4. What are you going to do with the proceeds of your reverse mortgage? It is almost always a bad idea to use a reverse mortgage to pay for a vacation or to buy a risky investment, like stocks or deferred annuities.

“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,” AARP says.

5. What kind of payout is best? Cash from a reverse mortgage can be paid out in several ways, including a lump sum, a monthly payment, a line of credit or a combination of those. If you do not need money right away, it is usually a bad idea to take all the money upfront, since it starts accumulating interest charges immediately.

Because reverse mortgages are complex, homeowners should seek advice from an independent adviser before speaking with a sales agent or mortgage broker. The number for the AARP’s reverse mortgage education program is 800-209-8085.