The Downsides of Reverse Mortgages

downsides of reverse mortgages

A “reverse mortgage” is essentially a mortgage loan for a homeowner at least 62 years of age who owns a primary residence free and clear of any liens, or who has significantly paid down the balance on the existing mortgage. Reverse mortgages typically only become due when the borrower passes away. When considering a reverse mortgage, you should be aware of the downsides of reverse mortgages.downsides of reverse mortgages

The Upside of Reverse Mortgages

Generally speaking, you cannot outlive a reverse mortgage. If you live in and maintain the home, the reverse mortgage loan will not become due during your lifetime.

Reverse mortgages need not be repaid until the homeowner permanently moves or passes away. Once that happens, the estate has approximately six months to repay the balance of the reverse mortgage. Often, this is accomplished by selling the property. All remaining equity then passes to the estate. The estate is not personally liable if the home sells for less than the balance of the reverse mortgage.

The Downsides of Reverse Mortgages

Reverse mortgages can make sense for seniors in many different financial situations, but there are also several potential downsides to reverse mortgages:

  • Taking out a reverse mortgage often rapidly depletes the home of its equity. This can leave seniors feeling trapped in their homes, without hope of selling and moving, because a home can quickly lose enough value to make the homeowner upside-down.
  • Reverse mortgages simply delay the inevitable. Since reverse mortgages require repayment after the homeowner sells the home, refinances, or passes away, the reverse mortgage is only putting off the inevitability of repaying the debt on the house.
  • Reverse mortgages are generally much more expensive than conventional home mortgages. Because the lender is taking a risk by delaying payment until after the homeowner passes away or moves, they can justify higher interest rates and closing costs. In the long run, reverse mortgages are much more expensive for homeowners and their heirs.
  • You can generally access only 30 to 80 percent of the equity in any particular home through a reverse mortgage. Thus, taking out a reverse mortgage may not completely solve your financial problems. You should take an honest look at your expectations prior to making a decision about a reverse mortgage.
  • Depending on the type of reverse mortgage you take out, you may still be responsible for property taxes and homeowner’s insurance.

When Considering a Reverse Mortgage

Homeowners age 62 and older may participate in the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program.  The HECM is FHA’s reverse mortgage program, and it is the only reverse mortgage insured by the U.S. Federal Government. Other reverse mortgages are available from various lenders. If you are considering a reverse mortgage, take a good look at the HECM.

Do not rely solely on the marketing materials of reverse mortgage lenders. You should first have a candid conversation with a financial advisor. Explore not only your motivations for considering a reverse mortgage, but also the practical effects on your finances. Discuss the downsides of reverse mortgages, not just the potential benefits. Only then can you determine whether your goals can be met by the equity in your home, your credit history, and your overall financial situation.

Avatar
About Brian V. Lee 566 Articles
Brian V. Lee provides bankruptcy, foreclosure defense, business turnaround, and litigation services to clients in the District of Columbia, Virginia, and Maryland. Brian was the Washington, D.C. state chair of the National Association of Consumer Bankruptcy Attorneys from 2016 to 2018.