A reverse mortgage has many advantages for seniors, but it also has some disadvantages. Professor emeritus Jack Guttentag at the Wharton School at the University of Pennsylvania, one of the premier business schools in the U.S., says of the government's reverse mortgage program: "The Home Equity Conversion Mortgage program is well-designed and provides options for meeting a wide variety of retirees' financial needs." However, there are downsides for seniors who go the reverse mortgage route. Surviving spouses of reverse mortgage holders who are under 62, or whose name is not on the loan, may be liable for the total amount of the loan upon the death of their spouses. The U.S. Department of Housing and Urban Development (HUD) and the American Association of Retired Persons have been wrangling in court over these types of issues in recent years, in addition to other lawsuits that have been filed.
While it is not feasible to cover all the pluses and minuses of reverse mortgages here, it is useful to highlight a few prominent considerations.
These pluses are powerfully attractive. Now, let's look at some drawbacks of reverse mortgages.
One major pitfall is that people take the pay-out in one big sum and invest or use it unwisely or burn through it before they die. The Department of Housing and Urban Development counsels people to take their pay-outs over a period of time, such as on a monthly basis, rather than in a lump sum. Many people do not heed that wise advice.
Obtaining a reverse mortgage requires a careful consideration of the weight all the pluses and minuses carry for seniors who are considering them. Reverse mortgages are like any other financial instrument-they work for and benefit some people very well, but for others, they may cause more problems than they solve.
It is important that each person carefully consider his or her own situation and speak to disinterested financial advisors (not loan originators) to decide if a reverse mortgage is a wise solution.
AARP. Are Reverse Mortgages helpful? April 2013. Available online at http://www.aarp.org/money/credit-loans-debt/info-04-2013/are-reverse-mortgages-helpful.html.
Guttentag, Jack.'Kosher' Reverse Mortgages: Fixing a Dysfunctional Market. Knowledge at Wharton, August 27, 2015. Available online at http://knowledge.wharton.upenn.edu/article/kosher-hecms-fixing-a-dysfunctional-reverse-mortgage-market/.
Lawson, Karen. Reverse Mortgage Pros and Cons: What Homeowners Need to Know. Lending Tree. Available at https://www.lendingtree.com/reverse-mortgage/reverse-mortgage-pros-cons-article