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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.
Key Takeaways
- 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.
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.
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
People of retirement age 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 those age 65 and over with their cash-flow, and some cities have programs geared toward helping those age 65 and over with fewer comparative resources with home repairs, but no such programs exist for homeowner’s insurance.
What Are the Costs of a Reverse Mortgage?
Home equity conversion mortgages, the most common type of reverse mortgage, bring a number of fees and costs. Some fees are one-time, and some are ongoing costs. To start with, all borrowers taking out a HECM reverse mortgage loan must undergo counseling from a HUD-approved reverse mortgage counselor. Costs for this counseling will vary, depending on the agency and the borrower’s specific circumstances. Other fees include origination fees, closing costs, and mortgage insurance premiums. You’ll also have to pay servicing fees to the lender for such costs as sending account statements, distributing loan proceeds, and making certain that you keep up with the loan requirements.
Can You Walk Away From a Reverse Mortgage?
If your outstanding loan balance exceeds the current property value and you can no longer stay in your home, you have a couple of choices. You can either do a deed in lieu of foreclosure or simply walk away. Reverse mortgage loans are non-recourse and its debt cannot be transferred to your estate or heirs.
When Do I Have to Repay a Reverse Mortgage?
Generally, reverse mortgage loans—usually a home equity conversion mortgage (HECM)— must be repaid when you move out of the home or when you die.
What If My Loan Balance Outstrips My Home Value?
When the last remaining borrower passes away, the loan has to be repaid. Most heirs will repay the loan by selling the home. If your loan balance is more than the value of your home, your heirs won’t have to pay more than 95% of the appraised value.
Can I Change My Mind After I Sign?
With most reverse mortgages, you have at least three business days after closing to cancel the deal for any reason, without penalty, according to the Federal Trade Commission. To cancel, you must notify the lender in writing. Send your letter by certified mail, and ask for a return receipt. That will let you document what the lender got, and when. Keep copies of your correspondence and any enclosures. After you cancel, the lender has 20 days to return any money you’ve paid for the financing.
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.
