Reverse Mortgages and Your Health

What possible connection could there between two seemingly disparate elements? You might be surprised to learn that your health should actually be one of the most significant factors in your decision to obtain a reverse mortgage.

Consider this: reverse mortgages aren’t economical if you plan to (and/or ultimately do) repay it within 5 years. That’s because of high upfront costs, including insurance premiums and origination fees. If you were to repay a reverse mortgage within a few years of receiving it, it would raise the effective interest rate above 10%, turning it into a very expensive loan. In such a situation you would be better off obtaining a home equity line of credit and simply repaying it in installments.

This is exactly the kind of situation that would materialize if you were to fall seriously ill within a few years of obtaining a reverse mortgage and were forced to move out of your home. Under such circumstances, the mortgaged property has ceased to be your primary residence, under which the reverse mortgage becomes due immediately. To make matters worse, the money that you would have spent on healthcare has already been paid to the lender and to the FHA, in the form of insurance.

This especially applies to those that may move into assisted living facilities or for whom there is a high likelihood of residing a nursing home. Such borrowers will have a difficult time justifying a reverse mortgage regardless of the duration. For those that move out and repay the loans within only a few years, the upfront costs mean that reverse mortgages are not economical. Those that pay back their loans after a “normal” duration (10-15 years) might find that they have very little remaining home equity (especially if their homes have not appreciated in the interim) with which to pay for the additional care that they now require.

What about those that obtain reverse mortgages not in spite of health problems, but in order to pay for them? While I’m not going to declare that this is an intrinsic mistake (it depends on the nature of one’s illness, the duration of treatment, and numerous other circumstances), I will say that if the health problems are chronic or likely to require further treatment like the use of special equipment as amazon pilates ball to improve body health and balance, obtaining a loan to pay for them is probably not the most prudent idea. Ultimately, a reverse mortgage is not a good source of emergency (i.e. short-term) cash, and in the long-term, it will gradually deplete your home equity such that it cannot be drawn on indefinitely for emergency (medical) purposes.

Let’s face it: the age of reverse mortgage borrowers is falling (in 2009, the average age was 72) with a significant number are in their 60s, and life expectancy is rising. In other words, it’s understandable that reverse mortgage borrowers would be complacent about their health. Few people in their 60’s want to plan for the possibility of one day ending up in a nursing home.

At the same time, consider that 50% of reverse mortgages are repaid within 6 years. Whether this is due to health reasons is ultimately unknowable. Still, I think that at the very least, potential borrowers should be cognizant of that fact, and should undertake a serious assessment of their own health before going forward with the decision to obtain a reverse mortgage.

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