A reverse mortgage can provide older homeowners with an economic lifeline, but there are reasons to be cautious before you trade an interest in your home for the luxury of no longer making loan payments.
Reverse mortgages allow you to tap into home equity, which is the difference between your home’s market value and the amount you owe. In order to qualify, you need to be at least 62 years old and have enough equity to justify a loan. Borrowers typically stop making mortgage payments and may receive a lump sum or a line of credit from the lender. However, interest will be added to the loan balance over time, gradually decreasing your home equity.
The loan must be repaid when the home is no longer the borrower’s owner’s primary residence, explains Mark Goldman, a loan officer with C2 Financial. Despite their benefits, reverse mortgages aren’t a good choice for everyone. What follows are potential downsides for consumers.
You’ll pay substantial fees.
Reverse mortgage lending fees typically are more expensive than the fees for traditional home loans, reports the Consumer Financial Protection Bureau. Your upfront costs will include lending fees, mortgage insurance, and real estate closing costs. Most borrowers wrap these expenses into the loan. Each month, interest and mortgage insurance charges will be based on your loan balance. The amount you pay compounds over time, which can get costly.
You’ll continue to have out-of-pocket expenses.
A reverse mortgage can help you avoid mortgage payments, but it won’t relieve you of property tax and homeowner insurance payments, Goldman says. To qualify for a reverse mortgage, you must show that you have the resources to pay ongoing property charges.
In addition, you’ll have to maintain your home so that the property doesn’t lose value. If you don’t meet these obligations, your reverse mortgage could go into default. This could force you to sell. In some cases, the home could go into foreclosure.
You may find the terms of your loan confusing.
Some seniors don’t fully understand the terms of their reverse home loans. New York attorney David Reischer, CEO of LegalAdvice.com, warns that some lenders sell reverse mortgages to people who don’t truly need them.
“Selling reverse mortgages is big business and it is incumbent on the borrower to seek counsel from informed family and friends that can be trusted,” he says.
According to complaints logged by the Consumer Financial Protection Bureau, many consumers become frustrated when they’re unable to refinance their reverse loans because there’s no longer sufficient equity in their homes. They didn’t realize that reverse loans could substantially decrease their equity over time.
Because there have been many changes to reverse mortgages over the years, it can be difficult for a layman “to keep up with all of the moving parts,” says Steven J. Sless, national reverse mortgage director for US Mortgage Corporation. “It has become a tool that is used more by the financially savvy.”
You must beware of scams.
The Federal Bureau of Investigation urges consumers to beware of scams when they shop for reverse mortgages. In some scams, seniors are presented with offers of free homes, investment opportunities, or foreclosure assistance. They may be targeted through investment seminars, television ads, or mailer advertisements.
Some reverse mortgage lenders may attempt to sell other financial products — such as annuities — that the borrowers don’t truly need, Sless says. It’s important to make sure you question anything you don’t understand. If you have a trusted friend, family member, or financial advisor, seek their input before you accept the loan.
“A reverse mortgage isn’t something a senior should make a quick decision on,” Sless says.
Your mobility will be restricted.
A reverse mortgage is a good idea only for people who plan to remain in their homes. Once you take out a reverse mortgage, you must maintain the home as your primary residence or repay the loan. Make sure there’s nothing that will compel you to move in the near future.
For example, if you’re thinking of moving to be closer to your grandchildren or other relatives, a reverse mortgage may be the wrong choice. If your children have left home and you’re thinking of moving to a smaller residence, having a reverse mortgage could spoil your plans.
“These loans are designed for people who intend to stay in their homes indefinitely,” says Goldman.
Your heirs may be disappointed.
Many people leave their homes to their heirs when they die. If you have a reverse mortgage, there could be very little equity value left in the home upon your death. In some cases, the value of the home isn’t even great enough to cover the amount owed to the lender when the home is sold. The lender will absorb the loss, but your heirs may be disappointed to learn they’ve inherited a home that has little or no value, once the loan is repaid.