By Lee Bruns

By now, we’ve all seen Danny Glover, Tom Selleck, or Fred Thompson sincerely touting how extremely wonderful reverse mortgages are. No doubt, there are people for whom a reverse mortgage is beneficial—usually the people with enough money and other resources that they don’t need one. But is a reverse mortgage right for you? The answer isn’t as clear cut as reverse mortgage companies would like you to believe.

Today, I want to clarify some of the murkiness surrounding reverse mortgages. I’m not going to spend a lot of time talking about the positive aspects of reverse mortgage; the reverse mortgage companies already spend millions every day to promote these products, so I’m going to assume you already know these benefits.

Here are a few simple facts about reverse mortgages to consider.

  • A reverse mortgage is still a mortgage.
    A reverse mortgage is a loan against the equity in your home. It accrues interest. But unlike a traditional mortgage, you don’t make payments. So the balance of the loan continues to grow, eating up your equity over time.
  • You must have and maintain sufficient equity in your home.
    Besides the inevitable process of compounded interest, you home can lose equity in other ways. The market could turn down, or you might not be able to afford the upkeep to keep the home in pristine condition (also a condition of many reverse mortgages). If you don’t have sufficient equity in your home, the mortgage company can foreclose, leaving you without a home and without the income stream from the reverse mortgage.
  • You or your home may not qualify.
    Because a reverse mortgage is a mortgage, your home must meet maintenance and other conditions that vary by the mortgage and mortgage holder. Further, you must meet fairly strict financial requirements, so you may not qualify even if a reverse mortgage would be perfect for your situation. One reverse mortgage broker told me around 25% of the people who apply don’t qualify. And while those qualifications were put in place to protect consumers from predatory lending, it doesn’t feel that way if you need the money and get turned down.

Remember I’m not saying a reverse mortgage is bad or that you shouldn’t get one. Like every financial package, it has its pros and cons. All I’m saying is that you should really think about whether or not a reverse mortgage is right for you before you sign up for one.

Next time, I’ll have something else for you to think about.