A reverse mortgage is a type of mortgage loan that's secured against a residential property that can give retirees added income by giving them access to the unencumbered value of their properties. But there are disadvantages to this approach, such as hefty fees and high-interest rates that can cannibalize a substantial portion of a homeowner’s equity.
- Reverse mortgages allow homeowners age 62 and older to access their home equity to generate income in older age.
- While a reverse mortgage may be ideal for some situations, it is not always best for others.
- If you want to leave your home to your children, having a reverse mortgage on the property could cause problems if your heirs do not have the funds needed to pay off the loan.
- Homeowners who obtain reverse mortgages must also live in the house, or else the loan can be nullified and lenders may foreclose on the property.
1. Your Heirs' Inheritance
When homeowners die, their spouses or their estates would customarily repay the loan. According to the Federal Trade Commission, this often entails selling the house in order to generate the needed cash. If the home sells for more than the outstanding loan balance, the leftover funds go to one's heirs.
But if a home sells for less, heirs receive nothing, and FHA insurance covers the lender’s shortfall. That is why borrowers must pay mortgage insurance premiums on reverse home loans.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).
Taking out a reverse mortgage could complicate matters if you wish to leave your home to your children, who may not have the funds needed to pay off the loan. While a traditional fixed-rate forward mortgage can offer your heirs a funding solution to securing ownership, they may not qualify for this loan, in which case, a cherished family home may be sold to a stranger, in order to quickly satisfy the reverse mortgage debt.
The guidelines in this article refer to home equity conversion mortgages (HECMs), which are backed by the Federal Housing Administration (FHA).
2. You Live With Someone
If you have friends, relatives, or roommates living with you who are not on the loan paperwork, they could conceivably land on the street after your death. Those boarders may also be forced to vacate the home if you move out for more than a year because reverse mortgages require borrowers to live in the home, which is considered their primary residence.
If a borrower dies, sells their home, or moves out, the loan immediately becomes due. One solution is to list your boarders on the loan paperwork; however, no one living with you under the age of 62 may be a borrower on the reverse mortgage.
3. You Have Medical Bills
Seniors plagued with health issues may obtain reverse mortgages as a way to raise cash for medical bills. However, they must be healthy enough to continue dwelling within the home. If an individual's health declines to the point where they must relocate to a treatment facility, the loan must be repaid in full, as the home no longer qualifies as the borrower's primary residence.
Moving into a nursing home or an assisted living facility for more than 12 consecutive months is considered a permanent move under reverse mortgage regulations. For this reason, borrowers are required to certify in writing each year that they still live in the home they're borrowing against, in order to avoid foreclosure.
4. You Might Move Soon
If you’re contemplating moving for health concerns or other reasons, a reverse mortgage is probably unwise because in the short-run, steep up-front costs make such loans economically impractical. These costs include lender fees, initial mortgage insurance costs, ongoing mortgage insurance premiums, and closing (a.k.a. settlement) costs, such as property title insurance, home appraisal fees, and inspection fees.
Homeowners who suddenly vacate or sell the property have just six months to repay the loan. And while borrowers may pocket any sales proceeds above the balance owed on the loan, thousands of dollars in reverse mortgage costs will have already been paid out.
5. You Can't Afford the Costs
Reverse mortgage proceeds may not be enough to cover property taxes, homeowner insurance premiums, and home maintenance costs. Failure to stay current in any of these areas may cause lenders to call the reverse mortgage due, potentially resulting in the loss of one's home.
On the bright side, some localities offer property tax deferral programs to help seniors with their cash-flow, and some cities have programs geared toward helping low-income seniors with home repairs, but no such programs exist for homeowner’s insurance.
The Bottom Line
If you're cash poor, but a reverse mortgage seems like trouble, there are other options, such as selling your home and downsizing to smaller and cheaper ones. Homeowners may also consider renting properties, which alleviates homeownership headaches like property taxes and repairs. Other possibilities include seeking home equity loans, home equity lines of credit (HELOC), or refinancing with a traditional forward mortgage.