Are There Downsides to Reverse Mortgages?

Couple in front of their home. Exploring some of the potential downsides to reverse mortgages.

Reverse mortgages can be an awesome financial tool for many homeowners. Yet, there are some potential downsides.

A reverse mortgage is far from a one size fits all solution for every senior homeowner. While it is a wonderful tool that can be used by many to provide lifelong security and greatly extend their years of independence, it is not appropriate in every scenario. Listed here are some of the cons or potential negatives of reverse mortgages. These items can be reviewed during the required session with a HUD approved counselor to ensure they are understood and accounted for in the financial planning phase of the reverse mortgage process.

Heirs may not be able to repay the mortgage without selling the home.

An aging parent may hope to take out a reverse mortgage but still have the family home remain in their children’s possession after they pass away or can no longer live in the home. In some cases this will be possible, but in others the heirs may need to sell the property in order to repay the mortgage.

There is no guarantee that the senior can stay in the home for the rest of his or her life.

The goal of a reverse mortgage is to allow aging homeowners to tap into the equity in the property and use those funds for other purposes, while still remaining in the home. This is a great alternative for many over selling the home in order to access that equity. Still, there are scenarios where it might not be possible for the homeowner to remain in the property. Some of these include:

  • Due to illness, injury, or other factors the homeowner can no longer safely live independently and must move in with a family member or to a nursing home or assisted living facility.
  • A line of credit (one of the payment options) is selected, and the homeowner exhausts these funds and can no longer afford to remain in the home.
  • Term payments (one of the payment options) are selected, and at the end of the term (fixed period of months over which equal monthly payments are received) the homeowner can no longer afford to live in the home.
  • Changes in expenses or other income result in the homeowner no longer being able to afford to stay in the home.
  • A failure to pay required property taxes results in foreclosure.
  • The property is rendered unlivable due to fire, flood, or some other hazard, and the homeowner failed to keep continuous insurance coverage on the home.
  • The property deteriorates to the point is rendered unlivable, and the homeowner cannot afford to have the necessary repairs and maintenance performed.

While these are all unfortunate scenarios that are extremely unpleasant to think about it is important to understand the reality of what could happen in the future and to plan for it. It is also crucial that the homeowner knows of their ongoing obligation to make property tax and insurance payments and to factor these expenses into their financial planning.

Up front costs could exceed benefits.

As with any home loan there are fees and expenses associated with a reverse mortgage such as it’s origination and processing, mortgage insurance, appraising the property to identify it’s value, and searching for any issues with the home’s title. Though many of these costs can be paid at closing out of the proceeds of the loan or financed as part of your loan, they can amount to a few thousand dollars. In rare cases if a tenure payment plan is selected, and the borrower passes away or is unable to remain in the home after a short period of time it is possible that the amount received could be less than the amount of the initial fees. In a term payment plan equal monthly payments are received as long as one borrower lives in the home as his or her primary residence. Of course, with this type of plan it is also possible for the borrower to live long enough to receive more than the value of the property, and that additional amount need not be repaid by the borrower or by the heirs when the borrower sells the property, no longer lives in the home, or upon his or her passing.

Must maintain home as a primary residence.

Once the borrower no longer lives in the home the reverse mortgage becomes due. For the purposes of this program it is considered a primary residence if the homeowner lives there at least 183 days out of the year. In addition if a homeowner does not live in the home for 12 consecutive months they no longer meet the primary residence requirement. If the borrower passes away, or decides it is time to sell the home and move in with family, into an assisted living facility, or make some other living arrangements it is generally expected that the mortgage will become due, and there is a plan in place about how to handle it. But what if the borrower needs to temporarily live elsewhere due to an injury or illness, family obligations, or some other reason, and hopes to return to his or her home a year or two later? This can get tricky with a reverse mortgage in place.

Financial security is not guaranteed.

Many factors impact the amount a specific homeowner will be qualified to take out with a reverse mortgage. Some of these include the age of the potential borrower, the amount of equity in the home, and the type of payment plan selected. It is not a given that any senior who owns a home will be able to borrow enough to sustain their current lifestyle indefinitely. If after evaluating the situation it is determined that a reverse mortgage will not solve the current financial hardships being faced there are other options. A financial planner or aging services professional can discuss ways to lower monthly expenses or provide information on assistance programs available in the area.

Although there are potential downsides to reverse mortgages, there are many homeowners who can benefit and use the loan to enjoy many more years in the comfort of home. Contact a reverse mortgage lender to learn if a HECM loan might be a good fit for your financial situation. Below are some additional resources to check out to educate yourself about reverse mortgage financing.

 

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