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Reverse mortgages can be a good way for seniors to access the money tied up in their home. A reverse mortgage is a loan given to homeowners who are 62 years of age or older and have considerable net worth. It allows these seniors to borrow money against the value of their home and receive funds as a lump sum, fixed monthly payment or line of credit. the entire balance of the loan becomes due when the borrower dies, moves permanently or sells the house.
If you think this sounds like an attractive proposition, you’re not alone. Reverse mortgages are also growing in popularity, with 43,000 issued in 2020 (the most recent stats available). This is a 23% increase over the previous year.
However, you should be aware that reverse mortgages come with risks, obligations and costs, and these are sometimes hidden or difficult to calculate before finalizing your reverse mortgage. In this article, we will introduce you to five of these problems.
- Sometimes the risks, obligations and costs of a reverse mortgage are hidden or difficult to calculate before finalizing your reverse mortgage.
- Lenders using high pressure selling tactics can be a red flag.
- There are many additional fees, which are often built into the loan, so they are not immediately apparent.
- You must add your spouse as a co-borrower, if applicable.
- A reverse mortgage does not mean the end of your expenses: you must continue to pay property taxes and home insurance, or you could face foreclosure.
- Other ways to access your home equity might be more profitable in the long run.
Some lenders use high pressure sales tactics
The first thing you need to know is that reverse mortgages have a reputation for attracting predatory practices and lenders. Some seniors have been targeted by high-pressure sales tactics on reverse mortgages. You should be especially skeptical if a salesperson gives you suggestions on how to spend your reverse mortgage money, and especially if they suggest putting the money into another financial product.
That doesn’t mean a reverse mortgage is always a bad idea, though. For many people, a reverse mortgage can be a great way to provide a steady, reliable income in retirement. Just make sure you understand all the intricacies of the mortgage you are taking out.
Reverse mortgage fees are high
The costs you will pay for taking out a reverse mortgage can be very high compared to other forms of borrowing against the equity in your home. Borrowers must pay origination fees, initial mortgage insurance premium, ongoing mortgage insurance (MIP) premiums, loan servicing fees and interest. The federal government limits how much lenders can charge for these items, but origination fees, in particular, can be steep — they’re capped at $6,000.
These fees may not be immediately obvious to seniors considering a reverse mortgage, as they are often paid for out of the money you borrow. This means that you won’t necessarily receive the money and then have to pay it to the lender, which can hide the fact that you are paying it. In practice, this process means that fees and interest are taken from the equity in your home.
Make sure you understand the residency rules for reverse mortgages and your other obligations. If you move away from your home for more than 12 consecutive months, even for medical reasons, you may be forced to sell your home. Likewise, your lender can foreclose you if you fall behind on your homeowner’s insurance premiums.
You should add co-borrowers
It is also important to pay attention to residency rules when taking out a reverse mortgage. A reverse mortgage must be taken out on your “principal residence”, which is where you spend most of the year. If you leave this residence for six months, or for 12 consecutive months even for medical reasons, your lender may terminate your reverse mortgage and require you to sell your home to pay off your debt.
This can be a particular problem for married couples who live together, but only one has their name on reverse mortgage documents. In this case, the spouse may be forced to sell his house to repay this debt while he still lives there. To avoid this outcome, you need to make sure you add your spouse as a co-borrower, or at least make sure you can prove they qualify as an eligible non-borrowing spouse.
You have obligations
When considering whether a reverse mortgage can help you in retirement, you need to consider the cost of property taxes and homeowners insurance. Most reverse mortgage lenders require borrowers to keep up to date on both of these aspects. That’s because your home is their collateral for the loan, and if it’s damaged it may not sell for the fair market price, which means the lender won’t get their money back.
In other words, after taking out a reverse mortgage, you will have obligations to your lender. And if you don’t meet them, your lender can foreclose on your loan. This is a real problem with reverse mortgages. In recent years, according to a 2019 Brookings Institution article on reverse mortgages, “18% of reverse mortgages ended in foreclosure,” sometimes because property taxes had not been paid. but most often because the owners no longer live in the house.
There are other options
Naturally, many reverse mortgage lenders won’t tell you that there are other, and potentially cheaper, ways to access the equity you’ve built up in your home.
These alternatives include:
- Cash refinancing. If you’re looking to access a large amount of equity at once, a cash refinance can help. This means that you must make monthly payments to a lender. However, in the long term, you can retain more of your capital compared to a reverse mortgage.
- A home equity loan or HELOC. A home equity line of credit (HELOC) allows homeowners to access the equity in their property. Unlike a reverse mortgage, home equity loans and HELOCs require borrowers to make payments. On the other hand, they may come with lower fees and may be a cheaper alternative to a reverse mortgage.
The best option for you will depend on why you are applying for a reverse mortgage. Contacting a HUD counselor can be helpful if you’re still unsure what to do.
What is the downside of getting a reverse mortgage?
Mainly the fees. Reverse mortgages have expenses that include lender fees (originating fees are capped at $6,000 and depend on your loan amount), FHA insurance fees, and closing costs. These fees may be added to your loan balance; however, this means you will have more debt and less equity.
Do reverse mortgages benefit seniors?
Sometimes, but not always. It has been reported that reverse mortgage lenders have targeted seniors with hard selling tactics. However, for some seniors, a reverse mortgage can be a great way to unlock the value of their home and provide a reliable source of retirement income.
How much money do you get from a reverse mortgage?
The proceeds you receive from a reverse mortgage will depend on the lender and your payment plan. For an HECM, the amount you can borrow will be based on the age of the youngest borrower, the loan’s interest rate, and the lesser of your home’s appraised value or the FHA’s maximum claim amount, which is of $970,800 as of January 1, 2022.
The essential
A reverse mortgage can be a good way for seniors to access the equity they have built up in their home. However, reverse mortgages can have hidden costs and obligations. It is important to understand them before agreeing to anything.
