Disadvantages of Reverse Mortgages

What Is A Reverse Mortgage?

A reverse mortgage loan is a financial tool secured by home equity.  Instead of paying the lender, the borrower receives payments throughout the duration of the loan.  Payments from reverse mortgage lenders to borrowers may be in the form of monthly income, lump sum cash, or line of credit.  Borrowers can also choose to be paid in a combination of these payment methods.  A reverse mortgage lender will not take payments, as long as the borrower has not vacated his property.  If the borrower vacates the residence, sells his home, or dies, the reverse mortgage should be paid immediately.  Reverse mortgage loans are good for retired individuals who want to enjoy an extra income source while not necessarily losing their home. 

Who Should Avoid Reverse Mortgages?

A reverse mortgage is great for people who want to have income to supplement their earnings from a pension.  The lump sum cash taken from reverse mortgage payments can also be paid out to borrowers, so they can have some money to use for more important spending priorities. 

However, a reverse mortgage loan is not a clear solution for everyone.  This loan is designed with certain assumptions, as it targets a specific market.  First, reverse mortgage loans give higher payouts for older borrowers.  If you are over 62 years old, you can qualify for the reverse mortgage loan, but you may not receive a higher monthly payment.  Much of the repayment of the reverse mortgage depends upon your home equity.  If the value of your home is low, it is terribly inefficient to apply for a reverse mortgage loan.  At the same time, if your house is not well maintained, or if you do not have time to repair your home during the course of the reverse mortgage, the lender may suspend the loan and ask for immediate and full repayment.  Make sure you have a quality home with high equity value.

Eligibility Requirements For Reverse Mortgages

Reverse mortgage lenders do not require a minimum income to be qualified for the loan.  The borrower must be at least 62 years old and must own a home clear of mortgage or have a relatively low home mortgage balance.  Once the borrower applies for the loan, he must use the property as his principal residence.  If you have a running mortgage balance, you must show the ability to pay off the remaining balance of your current mortgage.  You must undergo counseling to understand the impact of the loan on your finances.   

Your home must be a one-unit to four-unit dwelling, condominium unit, or a planned development unit project.  Leasehold units are also eligible if the borrower pays off the remaining balance prior to the loan's closing.

Disadvantages Of A Reverse Mortgage

In the grand scheme of the pros and cons of reverse mortgages, borrowers are urged to fully understand the disadvantages of reverse mortgages and weigh them against the benefits.  One clear disadvantage of a reverse mortgage is that you may have nothing to pass on to your heirs, if you have used up much of your home equity for reverse mortgage.  If you have children living in your home, it might be a difficult decision to give them the burden of losing shelter.

Reverse mortgages come with large fees rounding to as much as 5% to 6% on the amount of the loan.  While you can suspend these fees and roll them over into the loan, these fees will be added to the principal and increase your payments on interest.

The real cost of a reverse mortgage is hard to predict since it hinges on many factors.  The interest rates on the loan can climb; the appraised value of your home may change, and even your health and your ability to live in the home are significant factors.  Getting the most complete reverse mortgage information is important in assessing your financial needs and goals if you plan to take this route.

Fees In A Reverse Mortgage

The biggest inconvenience for reverse mortgage borrowers is the seemingly endless fees to complete the loan.  Some of the basic charges applied to complete a reverse mortgage loan include a one-time origination fee, monthly servicing fee, and various closing costs.  The origination fee is charged by the reverse mortgage lender to cover the cost of organizing the loan application.  Meanwhile, closing costs cover services and other charges to complete the loan such as title search, title insurance, survey, house appraisal, taxes, and recording fees.

Closing fees in a reverse mortgage vary by locality, since it depends on the individual cost of these services.  Other possible fees you may need to pay include credit report fees, recording fees, escrow, termite inspection, intangible tax, and more.  These fees can surprise you if they are not monitored thoroughly.  Take your time to understand these fees before you commit to a reverse mortgage loan.