Is a reverse mortgage a bad idea for someone my age?
I am 74 and own my home free and clear. A broker keeps calling about a reverse mortgage, saying I can take tax-free cash. It sounds too easy. What are the real downsides I should understand before I sign anything?
✓ Accepted answer
A reverse mortgage is not inherently a bad idea, but it is a complex financial tool that can jeopardize your independence and asset protection if misunderstood. For a 74-year-old who owns their home free and clear, the primary risk is reducing the equity your heirs inherit and potentially disqualifying yourself from means-tested government benefits.
1. Understand the Fee Structure: Federal Housing Administration (FHA) insurance on Home Equity Conversion Mortgages (HECMs) typically charges an initial up-front premium, often around 2 percent of the home value. Additional ongoing monthly premiums and origination fees can quickly erode the cash you receive. Ask your lender for a full amortization table showing how fees accumulate over time.
2. Impact on Government Benefits: While cash advances are generally not considered taxable income, the resulting liquidity can affect eligibility for programs like Medicaid or Supplemental Security Income. Before proceeding, consult a geriatric elder law attorney to model how the cash will impact your future care expenses and asset limits.
3. Tax Implications for Heirs: When you pass away or move out, the loan balance must be repaid. If the loan balance exceeds the home’s fair market value at that time, your estate may owe the difference, effectively leaving your heirs with a debt rather than an asset.
4. Mandatory Counseling: Federal law requires you to complete independent housing counseling from an approved agency before you can close. This is not just a box to check; it is a safeguard to ensure you understand the consequences of foreclosure or default on your primary residence.
5. Beware of Unsolicited Offers: Do not sign any documents based on cold calls. HECM loans are regulated by the Department of Housing and Urban Development (HUD). Request quotes from three different lenders and verify that the broker is licensed in your state. A true professional will welcome a cool-off period for your review.
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