Disadvantages of Reverse Mortgages - Caveats

A reverse mortgage may NOT be for you - Here are some questions to ask yourself

Here is some Good Advise:

Always consult your family before obtaining a reverse mortgage and make sure everybody is in agreement so there are no surprises later.

For all their benefits, reverse mortgages aren't appropriate for all homeowners. Think twice about a reverse mortgage if you are:

Concerned about the amount of equity going to you heirs?

How important is it for you to leave equity in your home to your heirs? Keep in mind that with a reverse mortgage, your loan balance rises over time because interest is added to the outstanding loan balance. There is the possibility that there may not be much equity to leave to anyone. Be sure to ask for an estimated amortization schedule to get an idea of how a reverse mortgage loan could grow over the years.

Concerned about leaving the home to you heirs?

You want to leave your house to your children. The balance of your reverse mortgage loan will become due and must be repaid in full when you die or move out of your home. If your children want to keep the house, they'll have to repay the loan, either with their own funds or by taking out a new traditional mortgage on the home.

Alternate Option - keeping the home in the family

If you want to keep the home in the family one alternative option to a reverse mortgage would be to sell your home to your children instead. The sale could include a "life tenancy" provision that allows you to stay in your home until you die. This arrangement can provide more income to a homeowner than they would have obtained through a reverse mortgage and ensured the home would remain in the family.

Concerned about how long you will be living in the home?

How long do you plan to live in your home? A reverse mortgage works best if you plan to stay in your home for a long time. The longer you stay the less expensive the loan is because the associated upfront fees. Borrowers typically pay origination fees, closing costs and, in the case of HECM loans, a mortgage insurance premium. Those fees are typically rolled into the loan amount so you don't have to pay them up front, and they help guarantee you won't have to repay the loan as long as you stay in your home. But if you plan to move in a few years, you'll end up paying for protection you don't need.

Concerned about a one time expense?

If you need money for a one-time expense, such as a new roof, check out local and state housing assistance programs before applying for a reverse mortgage. Such programs are often cheaper and quicker than reverse mortgages.

Consider down sizing to a smaller home near a senior community?

Would it be better to sell and move? Is your home too big for you to maintain? Down sizing to a smaller home is an option. Would you like to move closer to a senior community where you can enjoy senior social activities? These are options that shouldn't be ignored. Of course you would have to weigh the cost of buying or renting another place, but at least you get all the equity you've built up in your present home, all except for the 6% going to the realtor’s commission for selling your home.

Note - A reverse mortgage is really a refinance program, however there are some creative ways to apply this program if you are looking into buying another home.

Consider your ongoing home cost responsibilities

Your reverse mortgage won't cover the costs of keeping up your home. Reverse mortgage lenders can force repayment if you fall behind on property taxes or homeowners insurance. They can also require you to repay the loan balance if you fail to maintain your home.

Consider eligibility for need based public benefits

Consider whether a Reverse Mortgage might make you ineligible for any public benefits you now receive or may be eligible to receive in the future. For example, if you currently receive or expect to be eligible for any "need based" benefits such as Medicaid, Medi-Cal, or Supplemental Social Security Income (SSI), Reverse Mortgage payments will have to be structured so that monthly payments will be spent within the month they are received. If not, such payments will be considered "income," and may make you ineligible for public benefits. You should contact your benefits provider to ask about how a Reverse Mortgage may affect your eligibility.

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