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Posted August 15, 2008

Can I be forced out of my house if I have a reverse mortgage?

By Cheryl Costa

If I am retired and do a reverse mortgage, what happens if I live for such a long time that all the equity in my house has been paid out to me? Will I be forced to sell the house and give the proceeds to the reverse mortgage holder? Or would I be able to live in the house until I die or need to go into a nursing home?

First, a bit of background information on reverse mortgages. In order to qualify for a reverse mortgage, all borrowers must be at least 62 and the home must be your primary residence. Generally, there can be no other mortgage on the property. If there is another mortgage on the property, you will need to use some of the proceeds from the reverse mortgage to pay off the debt. A reverse mortgage, as it's name imples, is a loan against the equity in your home. The most common type of reverse mortgage is a Home Equity Conversion Mortgage or HECM.

The amount you can get depends primarily on your age, the value of your home, and the type of program you select. For example, an 85 year old living in a $500,000 home would qualify for a larger amount than a 64 year old living in a similar $500,000 home. To find out how much you could qualify for with a reverse mortgage, check out this calculator.

Once you are approved, the loan amount can be disbursed in one lump sum, paid to you in monthly payments, or established as an available credit line that can be tapped whenever you need it.

With reverse mortgages, you are never making any payments so your debt level is constantly increasing (because your equity is constantly decreasing). The good news is that you will never owe more on the loan than the house is worth. If property values drop after the loan is in place and you end up living a very long time, you might not have any equity left in the house but that would be the lender's problem, not yours, and the lender wouldn't be able to "evict" you because that situation occurred.

As long as you are living in the house and maintaining it properly, you do not have to pay back the loan. Reverse mortgages come "due" when:

the borrower has died,
the borrower sells the home, or
the borrower has not lived in the home for one continuous year.

So, the reverse mortgage wouldn't even be due if you needed to go into a nursing home for a year or less. You would have to be in the nursing home for a year or more.

Technically, the lender can also demand payment if you:

don't maintain your home,
don't pay your taxes,
don't carry the necessary insurance, or
declare bankruptcy.

I am really not a huge fan of reverse mortgages, as they tend to be very expensive. When you take out a reverse mortgage, you will incur origination fees, servicing fees, and closing costs. Total costs on a $250,000 loan amount could run close to $20,000. However, in certain situations, reverse mortgages are the only option on the table.

I do think that in just a few years, the costs associated with these products will come down and the terms in general will become more favorable. Baby boomers retiring in the next decade or so may find themselves short on retirement income but long on home equity so the demand for these products is likely to increase.

ABOUT MANAGING YOUR MONEY Investment adviser Cheryl Costa provides personal finance insights and advice. see all globe blogs Cheryl Costa is a principal adviser at Family Financial
Architects in Natick. She specializes in education planning, retirement saving strategies, and family budgeting. She holds a master’s in business administration from Boston University, and is pursuing a master’s degree in taxation at Bentley College.

© 2008 NY Times Co. Published by The Boston Globe, Thursday, July 14, 2008. 

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