I am often asked if a reverse mortgage is safe and is it a good program?  I always answer that, yes, it is very safe and it is a wonderful program. However, I don't think that is necessarily the right question to be asking.  The question anyone who is considering a reverse mortgage should ask is this: "Is the reverse mortgage right for ME?".  It is an issue of "appropriateness". 

Let's look at some issues that must be considered before "signing on the dotted line"....But first a quick review of the reverse mortgage.....

A reverse mortgage is a home equity loan that you do not repay as long as you live in the home. You must be at least 62 and the house must be debt free or you must be able to pay off the debt with the proceeds from the reverse mortgage.  In other words, the reverse mortgage can eliminate your house payment and free up cash flow for retirement.  In addition to paying off the existing mortgage, you may be entitled to a monthly income or a line of credit to be used whenever you need extra money. 

As wonderful as this sounds, a reverse mortgage is not for everyone.  This is what I tell my potential borrowers...............

Do you plan on staying in your home?

It is crucial that you plan on staying in your home for at least 3 to maybe 5 years for the loan to make financial sense.  The upfront fees are high and the longer you stay in your home, the more likely the fees will be offset by the increased value in your home.  If you were to sell a year after doing a reverse mortgage, you would lose a substantial amount of your equity to fees.  So, if you are planning to sell in the near future, do not even consider a reverse mortgage.

Most of us want to stay put.  An AARP study done in 2000 showed that more than 90% of seniors wanted to stay in their homes for as long as possible. Almost 82% still wanted to stay even if they needed care. 

However, as we age, the upkeep of the home may become overwhelming. The lawn still needs cutting, bushes trimmed, weeds pulled, and gutters cleaned. The inside needs dusting; the carpet needs vacuuming and the windows need washing.  Perhaps we can't get around as well as we used to.  Eventually, in many people's minds, these become reasons to sell.

But are they really? Leaving the home you have lived in for many years can be a gut-wrenching experience.  We are used to our community, our neighbors, our church, and the store where we buy our groceries.  Our homes hold a lifetime of memories.  Weigh all of your options carefully before taking this drastic, final step.  Would you have enough money from the sale to buy something else?  Where would you go?

Consider what it would cost to stay put. Write down what it would cost on a monthly basis to get someone to help with the house.  Look at hiring someone to come in and clean. Hire a lawn maintenance company or the teen-ager down the street.  You may find that paying for help is a lot less expensive than moving.  The reverse mortgage could provide those funds. 

What if the home is too big or if it has two stories and the stairs are getting harder to climb? You might want to consider making modifications to the home to meet your needs - install a lift on the stairs, or modify the bath to make it easier to use.  If the home is too big, close some rooms off. If it costs too much to heat or cool, seal the vents in un-used rooms. 

Sometimes it makes sense for one of the children to move in and serve as a caretaker, cook, lawn-cutter, etc.  That can be a win-win situation for everyone concerned:  the parent gets the help they need and the child has a place to live. (This is NOT a very popular solution!).

Another option to consider is selling the home to the children. The parents would continue to live in the home and pay rent to the children.  When the parents pass on, the home belongs to the children as an investment.  When structuring such an arrangement, be sure to get legal and tax advice.

Weigh the pros and cons of selling very carefully.  Consider not only the financial "costs" of moving, but the emotional ones as well.  Find the solution that is right for you. One solution is the reverse mortgage.   It can provide the funds for "aging in place", maintaining the home, and the installation of modifications to the home.

Were you planning on leaving equity or the home to your heirs?

Another major issue to consider is this:  Reverse mortgages can reduce or eliminate the children's inheritance.  A reverse mortgage balance increases as the years go by because the amount you borrowed is accruing interest.  Since there are no monthly payments, the interest will grow until the loan is due and payable at your death or when you sell the home.  Whatever the loan balance is at that time, it must be satisfied. 

If you have died, the heirs will most likely sell the home and pay off the lender.  Any remaining equity belongs to them.  If your kids want to keep the home, they can refinance into a regular mortgage and pay off the reverse mortgage.  They don't have to sell the house.

If for some reason the home is valued less than the loan balance, the FHA insurance will pay the difference.  In this situation, your kids will sell the home but they won't get a dime from the house.  How important is that to you?  A good reverse mortgage specialist can show you projections on just how much may be left at the end of 10, 20, or more years.  The odds are that there will be something left to inherit, but you won't have the full selling price of your home to leave your loved ones. But if they're financially sound in their own right, do they really need a substantial inheritance?  You have to weigh the benefits of the reverse mortgage to YOU while you are alive versus the benefits to heirs once you are gone.

One solution is to take funds from the reverse mortgage and give it to the kids while you are still alive to see the joy it brings.  The money can be used to help adult children get into a home of their own, to start a business, or whatever is important to you and to them.  Why wait until you are gone to share a legacy?

What if you have dependents who depend on keeping the home (this does not include your spouse)? Perhaps you have a disabled son or daughter who lives in your home.  Where will they go after you are gone?  Do they need the home to live in?  At the same time, you have to consider if they are capable of living on their own without you. If not, it won't matter if the home is left to them or not.  A better solution would be to create a trust fund for them.  You could do that by drawing out the equity of the home with a reverse mortgage and setting up a fund for their care once you have passed on.

Only you can decide how important these issues are to you and the long-term effects on you and your family. You have to weigh the pros and cons, the benefits to you versus the benefits to heirs, and the consequences of your actions. This is a personal decision that requires some careful planning.