Although a reverse mortgage can be a highly beneficial financial choice for many seniors, it isn’t always the best choice for everyone. If you’re considering applying for a reverse mortgage, you should take the time to carefully consider the pros and cons associated with this home loan program before making a final decision.
Most homeowners who have researched reverse mortgages know that the benefits can outweigh the potential drawbacks; however, here are a few of the most common negative attributes of reverse mortgages. Review them carefully and consult with a mortgage professional before deciding to rule out the option completely.
1. The reverse mortgage balance can increase over time. Due to the nature of a reverse mortgage – in which you draw funds from your home’s equity – the more money you take out, the more your balance will grow. Fortunately, the balance will not need to be repaid until the home is no longer your primary residence.
2. The value of your estate inheritance from the home’s equity may also decrease over time as the funds are spent. Since you are spending the money you’ve built up in your home over the years, after you pass away, your heirs will most likely have less inheritance from the estate.
Typically, after a reverse mortgage borrower dies, their heirs or estate will pay off the mortgage by selling the home. Any profit left over after the sale of the home and after the repayment of the reverse mortgage can be allocated to your heirs, but in some cases there isn’t enough money left for the heirs to inherit. In fact, some heirs are unable to sell the home for a large enough amount to satisfy the reverse mortgage balance. Fortunately, in these cases, the heirs are NOT held liable and the mortgage lender has to claim a loss and request reimbursement from the FHA.
3. Reverse mortgages have an initial FHA mortgage insurance premium. (Speak with your lender for details on the amount – there may be a more affordable option)
4. Reverse mortgages also carry annual FHA mortgage insurance premiums. (Speak with your lender for details on the amount).
5. While entitlement-based benefits like Social Security and Medicare are NOT affected by having a reverse mortgage, needs-based government benefits may be decreased for the homeowner, as the funds drawn from the loan may exceed monthly income limits.
6. Fees associated with the reverse mortgage may be higher than those associated with conventional mortgages. Origination fees are often higher for reverse mortgages, but you should review the numbers with your personal mortgage consultant to compare and contrast. You may be surprised to find out that a reverse mortgage is more affordable than you think.
7. Not all homes will qualify for a reverse mortgage. Because reverse mortgages are backed by the FHA, the collateral for the loan (your home) must meet HUD property standards. This may be more difficult for certain housing types like condominiums or mobile homes.
8. Reverse mortgages can be harder to qualify for if your loan closes with your property in a trust. In these cases, trusts will most likely need to be revised so that the language allows for reverse mortgages. This is usually done by an estate planning service and can sometimes be expensive.
9. Refinancing a reverse mortgage is tricky. Refinancing is allowed on a reverse mortgage only under special circumstances. (Speak with a qualified lending professional to learn more about the specifics).
10. Reverse mortgages are hard to get on newly purchased homes. Lenders like to see at least a six month chain of title before granting a reverse mortgage. This helps them ensure that there is no loan fraud involved.
For more information on reverse mortgages check out these resources:
- Information on reverse mortgage on the FTC’s website
- Posts and news on reverse mortgages from AARP’s site
- Gateway Bank Mortgage’s reverse mortgage website – has lots of good information and a comprehensive section on frequently asked questions
- HUD’s (Department of Housing and Urban Development’s) 10 Things to Know About Reverse Mortgages
The information provided in this post is subject to change. We recommend that you speak with a licensed reverse mortgage professional in your area for information on their products and services.