Reverse mortgages do have a bad side. There are many reasons to avoid taking a reverse mortgage loan on your primary residence. Your equity is typically in America the biggest source of wealth and you need to get educated to protect this wealth you have accumulated. After writing and reviewing the negatives of this loan, we must say that for the majority of seniors this is a viable program for retirement success. If you have questions or concerns after reading this article please get in touch with us so we can explain in more details for your specific case. Everyone has different retirement goals, wealth/financial accumulations, and expectations of how they want to retire. Ultimately we wish you the best of luck in your retirement and we know that by being educated, and by comparing multiple quotes we can assist in the retirement of many in the US.
1.) Fees/Closing Costs/On going fees
There is no free lunch. Reverse mortgages are NOT free. This is not a free grant or a special program that benefits seniors without there being fees involved. The bank you deal with has to make fees to pay its employees and to keep its lights on. Reverse mortgages are more costly than a traditional home equity line of credit (HELOC – home equity loan) but it is also cheaper than doing a real estate transaction such as selling/buying a home. The media has portrayed the fees as being outrageous but this is the only program that allows a mortgage payment to be eliminated in retirement guaranteed without having to sell or move (which is very expensive on its own). For this convenience and to be able to utilize a reverse mortgage naturally there are fees. How much can you expect to pay in closing costs? $10K+ in closing costs and fees is expected. The higher the home value the higher the amount you will pay in fees. Some of the fees go directly to FHA, which is an insurance to protect both you and the lender. It makes sure you receive your payment from the bank no matter what happens to real estate prices, it also protects the lender from your home decreasing in value substantially that they will get paid.
2.) Less equity for your heirs
The more equity you tap into the less equity potentially there will be for your heirs. Potentially because your home can increase in value dramatically over the course of your reverse mortgage growing much faster than the interest you accumulate on the loan. Then you would be in a position of having more equity for your heirs (or breaking even). There is a risk/chance that the equity is decreased substantially as well. As you borrow, if home prices decrease this could be a double whammy. If your heirs are comfortable financially and do not want to inherit the home this is not a down side or a bad thing. If they are wanting to inherit the home this may be a concern if home prices in your area are weak or don’t grow at a rate faster than the rate the bank is charging you for the HECM loan.
3.) Interest rate accumulation -Negative amortization
The amount of money you borrow from a reverse mortgage has an interest rate attached to it. The longer you keep your reverse mortgage loan, the more the loan balance grows over time. This is the reverse of a normal traditional forward mortgage loan that you make monthly payments towards. As mentioned above if your home goes up in value dramatically this may not be an issue for your heirs. If you live for a very long time and the home value decreases substantially past what you owe on your reverse mortgage loan, there is a loan feature called, non-recourse which protects your heirs from not paying more than what the home is worth. This is a very good feature to protect consumers and their heirs.
4.) More difficult for your heirs to inherit the home
Your heirs will have to at the time you pass pay back your reverse mortgage loan if they want to keep the home. For many this may not be a possibility. They can take out a mortgage to pay off your reverse mortgage loan that is an option. The rules state that the heirs will not have to pay back the reverse mortgage if they don’t want to keep the home. This is a good point since they are not obligated to buy back the home from the bank. If there is equity left in the home then the heirs will receive that equity after the sale of the home.
5.) If you are being sold into an annuity or another investment with your proceeds, avoid.
If your reverse mortgage broker or financial planner is telling you to get a reverse mortgage to then make an investment you need to avoid this transaction. This could be a scam deal, one where you are going to pay a higher interest rate on your reverse mortgage vs what the investment will yield for you as a total return.
6.) If you are planning to move within a few years avoid the reverse mortgage.
Do not take reverse mortgage loan if you are planning to move with a few years time. This won’t make sense as the fees only make sense paying when you are going to stay for a long time. A few years in a home to avoid a mortgage balance or take out some cash may not be the right decision as the fees will eat into your equity initially quite substantially.
7.) Health issues.
If you have health issues you may want to avoid a reverse mortgage loan if you can. If you need to go to an nursing home or care facility for a period of 12 months or longer the bank can call the loan due and ask for you to pay back the loan. Banks are understanding but there are some restrictions regarding how long you can be away from the home (this needs to be your primary residence and you need to live in the home for 6 months out of the year). Most banks would give you an extension if you explained your situation but its another reason to avoid a reverse mortgage.
8.) Younger spouse
You may want to avoid taking a reverse mortgage right now if your spouse is not yet 62. This will limit how much funds you are able to borrow and also add more risk to the deal. If something happens to the spouse who is over 62 the loan can come due unexpectedly and the younger borrower could be put into a tough financial situation. Reverse mortgages are meant for those seniors who are 62 years of age or older to enjoy. While its possible to take reverse mortgage loan if you are not yet 62 (at least one borrower is 62) there are added risks to this transaction and more limitations on the funds/proceeds.
9.) Physically not fit.
Your property needs to be maintained and for some this is not possible with a physical disability. You could use the funds from the reverse mortgage to hire help but something that you should be aware of. FHA and the banks expect the property to be maintained.
10.) Property taxes/insurance/maintenance
You are obligated to pay for property taxes and insurance as well as maintenance. While this also applies without a reverse mortgage loan it is very important you budget your funds to cover the property taxes and insurance.
11.) Major home repairs:
Any major repair to the property will be to be done before or while the reverse mortgage loan is in process. An FHA appraisal will determine the value of your home and the condition it is in. Condition is important as mentioned above as it needs to be upkeep by the consumer. If a roof needs to be replaced expect this fee to be deducted from your equity and any from the amount you would have instead received. For some this is not a negative as either way this would have been done on your part from the proceeds.
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