Reverse Mortgage Problems You May Not Think About
Marketing schemes make reverse mortgages sound like a panacea for older folks who have paid off most, or all, of their mortgage. One of the reverse mortgage problems I remember most compares two couples: one struggling with bills to pay and the other looking completely carefree, with the latter couple, of course, being the ones that took out a reverse mortgage on their home.
Sounds ideal, doesn’t it? Using the equity you’ve built up in your home, no monthly mortgage to pay; sounds almost like getting a raise!
Ever since reverse mortgages came onto the market in 1961, controversy has surrounded them. After all, when a person is financially struggling, getting a sure amount of money each month, or in a lump sum, without having to pay anything back sounds like a great solution.
However, a reverse mortgage may not be a homeowner’s best alternative. They’ve gotten better since the Federal Housing Authority (FHA) instituted new rules and regulations designed to protect seniors literally from themselves, but there are still risks to be aware of.
Why? Well, let's take a look at some reverse mortgage problems that people experience.
Your Home Could End Up Being Under Water
While a reverse mortgage allows you to access the equity in your home with mortgage payments deferred until you die, sell, or move out, the fact is interest is added to the loan balance each month. Eventually the loan balance could exceed the value of your home and your home could be under water, particularly if there’s another housing crash.
As with any loan you take out, you’re going to incur loan-related fees. Origination fees, for example, are usually rather high because neither your income nor credit score comes into play. Basically, reverse mortgages are a no documentation loan. That means the lender is assuming a high risk, so they have to offset that risk by charging higher fees at the beginning of the loan.
Interest Rates Are High
You’ll probably be surprised when you find out how little actual money will end up in your hands after the lender deducts up-front fees and high interest rate charges. Interest rates on a reverse mortgage are generally higher than on a traditional home equity loan.
You – Not the Bank – Are Responsible for Certain Home Costs
Regardless of how long the process takes, or what you get out of it, you’re still responsible for paying the property taxes, keeping up with all maintenance, such as putting on a new roof if it’s needed, homeowners insurance, and so on. If the equity in your home is high enough, your reverse mortgage could possibly cover these expenses, but it’s difficult to say.
Sometimes Your Home is All You Have to Leave Your Heirs
While you don’t make payments on the reverse mortgage while you’re living in the home, the loan must be paid off when your home is sold, whether you’re alive or dead. Translated, that means that if your heirs can’t pay off the loan balance, they can’t have the house.
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It's Not a Good Investment Idea
Taking a reverse mortgage out on your greatest investment – your home – to make another investment is not a good idea. Please realize that you’re putting your greatest investment at risk. Why take the chance that the equity you’ve accumulated in your home could very well be wiped out if your investment goes south and you can’t keep up with your required obligations?
Don't Let Anyone Pressure You
Sometimes a family member or a friend will come to you asking for financial help. If taking a reverse mortgage on your home is the only way to help, think long and hard. That family member or friend will find another way to get the money they need, and you won’t be risking the equity you’ve built up in your home. Loaning money you don’t comfortably have will lead to bad consequences down the road for you.
You Just Want Some "Play" Money
If all your bills are up to date and you’re living comfortably but you just want some extra spending money, again, think hard before getting a reverse mortgage. Isn’t it more comforting to know you have equity in your home for a possible future emergency?
Servicing Fees Through the Life of the Loan
Since there is a need to service the loan throughout its life, lenders – or their agents – are able to charge a monthly servicing fee. When you close your reverse mortgage loan, it’s not unusual for the lender to set aside the servicing fee and deduct it from the actual funds you receive. Additionally, each month, the servicing fee is added to your loan balance.
The good news for you, if you’re still considering a reverse mortgage, is that because of the bad press these loans have gotten (think a big bank throwing a senior out of their home), changes have been made by the Federal Housing Authority (FHA).
The maximum amount that can be taken out of a home’s equity now has been lowered by 10-15% ensuring that the money won’t be utilized to try and cure financial distress instead of what it was meant to do: fund part your retirement plan.
There are also rules in place that make it much more expensive to withdraw more money at one time and lenders are now required to make sure that borrowers have ample funds to pay their property tax and insurance obligations, helping to make sure they are able to stay in their homes.
There are so many factors to consider. Your age, your financial needs now and down the road, how long you expect to remain in your home, where you’ll live when you leave it, and so on. It is a personal decision, and one you should spend a lot of time thinking on.
If you are considering a reverse mortgage, you can find more information from Consumer Financial Protection Bureau, Consumer Guide on Reverse Mortgages, or by talking to a financial counselor who specializes in reverse mortgages. Be sure to do your research so you don't experience any reverse mortgage problems.