Overview of Reverse Mortgage Disadvantages, Costs and Issues
Reverse mortgages have grown in popularity over the past few years. These loans, which can be government-backed loans (such as Home Equity Conversion Mortgages or HECM loans) or proprietary reverse mortgages, provide an additional source of cash access for individuals that are 62 years of age or older without requiring them to move.
The advantages of reverse mortgages that get many people hooked on these types of loans is that they don’t have to pay it back until they stop using the home as their main residence or stop meeting the mortgage obligations, so there’s no monthly payments.
But are you wondering about the downside of reverse mortgage options?
This guide will take a look into the downside of reverse mortgage selection, including the cost reverse mortgage options and some key reverse mortgage disadvantages.
You’ll also learn about tips to avoid reverse mortgage pitfalls should you decide to go forth with getting a reverse mortgage.
This guide also provides you with alternatives to reverse mortgage pitfalls, such as a home equity line of credit or home equity loan. Let’s explore reverse mortgage disadvantages and how to overcome them.
What People Want to Know about Reverse Mortgage Disadvantages
If you think you’re the only one with concerns regarding reverse mortgage risks, think again. Here are some common concerns people want answers to regarding reverse mortgage risks:
- What is the major downside of reverse mortgage options?
- What are some reverse mortgage pitfalls?
- What are some problems with reverse mortgages?
- Are reverse mortgage costs worth it?
Key Problems with Reverse Mortgages
Although there can be many reverse mortgage disadvantages, there are a few key problems with reverse mortgages that are of particular concern:
Reverse mortgages can be confusing.
One of the major reverse mortgage pitfalls involve how confusing the information can be. If you are unaware of financial details that are involved with mortgages and reverse mortgages, the information presented to you on reverse mortgages can seem overwhelming. Moreover, industry jargon contributes to the problems with reverse mortgages. Key phrases and acronyms, such as effective rate, principal limit factors (PLF), and expected rate are common when discussing reverse mortgages.
If you don’t understand what the terminology is referring to in the documents that you receive about reverse mortgages, then it will be hard to grasp the entire concept. Furthermore, the rules can get extra confusing when the borrower dies and has a surviving spouse.
Reverse mortgages can cost more than what you are expecting.
The downside of Reverse Mortgages
Out of all the reverse mortgage disadvantages, you can think of, cost plays a significant role. The cost of reverse mortgage options is one of the major reverse mortgage risks because they can be incredibly expensive.
This is because several factors are involved in the cost of reverse mortgage options, such as mortgage insurance, lender fees, and closing costs. Many cash-strapped seniors choose to forego paying up-front costs out of pocket and use their loan to pay these costs instead.
This method of paying up-front reverse mortgage costs contributes to the slew of reverse mortgage pitfalls because it typically tends to be more expensive in the long run to pay with your loan versus up front with cash.
Interest accrues on the loan over time, and closing costs to settle the real estate transactions, such as title insurance fees, appraisal fees, up-front mortgage insurance premium (MIP), and inspection costs also can make the cost of reverse mortgage options increase.
For example, you will typically pay a higher MIP fee if you need more than 60 percent of your home’s appraised value. That’s a difference of two percent of your home’s appraised value up to $625,500 that you can save. Also, your required counseling session or class can cost more than $100. With all of these costs, you can end up paying thousands of dollars to get your reverse mortgage.
Reverse mortgages can come with high interest rates.
Another downside of reverse mortgage selection is the high interest rates. These interest rates are often variable and can change.
This will work against you if the rate changes to be higher than when you initially received the loan, which can increase the cost of reverse mortgage.
Class attendance is required.
One of the problems with reverse mortgages that often gets overlooked is the fact that class attendance is required. You cannot obtain a reverse mortgage without attending a consumer education course that is pre-approved and offered by a public agency or nonprofit organization.
So, you don’t get the counseling and attend the class, you can’t qualify for the loan. Also, the class or counseling session is not always free. It can cost more than $100.
It may not provide you with enough cash.
Keep in mind that all reverse mortgages have a limit to the amount of money you can access. For example, the HECM is capped at $625,500. So, if you need more than that amount, then a reverse mortgage may not be the best option to fulfill your needs.
Your home will not necessarily be for you or your heirs.
One of the major reverse mortgage pitfalls that cannot be ignored is the fact that your home will not go to you or your heirs when it’s time to repay the loans. For example, when you pass away, your heirs will be sent a letter to figure out their intentions for the home and loan.
If they want to keep the home, the heirs will have to pay for the loan completely up front since loan payments will be due upon the death of the borrower.
If they cannot afford to repay the loan with cash or other assets or qualify for a refinance, they will have to sell the home.
Although selling the home to cover the cost of the amount owed is usually an option, it may not be enough to cover the loan. If the loan is more than the value of the home, and your heirs cannot afford it or don’t want it, they may have to consider signing a deed of foreclosure over to the lender.
Additionally, reverse mortgage lenders have the right to foreclose your home if you don’t keep up the appearance of the home or fall behind on property taxes, homeowner’s association fees, and homeowner’s insurance payments.
That means if your income or financial situation changes when you get older and is insufficient for keeping up with home repairs, insurance payments, and property taxes, you can lose your home.
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Avoiding Reverse Mortgage Pitfalls
If you’re skeptical about getting a reverse mortgage, but you still need a solution to solve a cash problem, try exploring other options. Here are a few alternatives to avoid reverse mortgage pitfalls that you can consider.
Let your children buy your home.
If you have adult children who are willing to help you in your time of need, you can consider offering your home for sale to them. Keep in mind that selling your home to your children is not a casual event.
Therefore, both you and your adult children should get real estate attorneys involved to make sure you’re drafting up the proper documents and understanding the terms you are both agreeing to fulfill.
You can accomplish this title transfer by letting your child finance the sale of the home, so he or she can directly take over your monthly payments. This method allows you to forego dealing with a third-party lender.
That way they have the guarantee of your house as a collateral in the event you are unable to pay back your loan should you pass away.
Refinance your home.
Although refinancing your home doesn’t give you physical cash in your hand, you are essentially lowering your monthly payments over the long haul.
Therefore, this option can be helpful to free up money so you can live in retirement with more ease. However, keep in mind that this option doesn’t necessarily trump the cost of reverse mortgage options by avoiding costs altogether. You will have to pay closing costs, which may cost quite a bit of money.
Go back to work.
Problems with Reverse Mortgages
Just because you’ve retired doesn’t mean you have to kick the possibility of work completely out of your life. You can go back to work to bring in some income that can help you pay for your mortgage.
Today, what is considered as work goes beyond a standard in-person job, such as bagging groceries or a desk job as a customer service representative. You can work from home if you have a reliable and secure Internet connection and a computer.
You can outsource your skills online by writing, tutoring, designing, or even doing voiceover acting work. You can also use this opportunity to make passive income, such as affiliate marketing from maintaining a blog or creating an online course.
Whichever route you choose, going back to work can significantly increase your chances of getting cash in your hand when you need it the most.
Take out a home equity loan.
When you take out a home equity loan, you can get a lump-sum payment. You have to pay this lump-sum loan back over a specific time period. This payment is usually in the form of fixed installments that you pay every month for the life of the loan.
This option is ideal if you need your money up front, right away. You can also expect low fees and easier approval with this type of loan than a reverse mortgage loan.
However, keep in mind that you will have to pay interest on the entire loan regardless if you use the entire amount or not. Also, you may just be joining in the pool of reverse mortgage risks because your home can go into foreclosure if you fall behind on payments.
Get a home equity line of credit (HELOC).
Another option that can help you circumvent the high cost of reverse mortgage options includes getting a home equity line of credit.
With an HELOC, you can borrow against the equity of your home up to a specific limit. Instead of paying interest on the entire amount of the line of credit that you are allowed to borrow, you only pay interest on the amount you actually use.
This option may be suitable for you if you just need cash for an emergency, such as a leaky roof that needs to be fixed. However, keep in mind that HELOCs carry interest rates that can change with the modifications in the prime rate of interest. Don’t forget to keep up with your HELOC payments, or you risk losing your home to foreclosure.
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Tips for Avoiding Reverse Mortgage Pitfalls
Learning about all the reverse mortgage disadvantages that exist can seem daunting. However, if you still want to pursue a reverse mortgage, you still can make the right moves to avoid reverse mortgage pitfalls. Consider these tips to dodge reverse mortgage pitfalls:
Know what you’re getting into by getting a reverse mortgage education.
Although it may seem tedious, its important to learn all you need to know about reverse mortgages, including reverse mortgage costs. That’s why it’s vital to attend the required reverse mortgage classes and to get counseling to avoid reverse mortgage pitfalls.
You’ll learn about reverse mortgage risks that you may not have considered. Also, consider bringing your heir or adult child to the counseling session so that they are not surprised or overwhelmed by their options with handling and paying for the reverse mortgage once you pass away.
Although HECMs are the most widely used reverse mortgages on the market today, they are not your only option. Get multiple quotes from different lenders and consider all the costs involved. You can even save on your closing costs by shopping around for the best deal on fees and other reverse mortgage costs.
You never know what you can get until you ask, so make sure you speak up and ask questions if you are unclear about a term or want to know if you can get a fee waived to avoid reverse mortgage pitfalls.
For example, if you have low income, you can ask your reverse mortgage counselor if they waive the counseling fee. Also, be sure to ask all the questions you need answered during the counseling session to avoid reverse mortgage pitfalls, including if you don’t understand the terminology.
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Reverse mortgage pitfalls, such as high fees and interest accumulation, are factors that cannot be ignored when you’re considering whether it is worth taking on reverse mortgage costs.
The potential of your heirs not being able to pay off the reverse mortgage once it’s due and possibly needing to sell off the house are also cause for concern.
However, you can consider taking the right steps to avoid these reverse mortgage pitfalls. You can also consider alternatives to reverse mortgages to dodge these reverse mortgage disadvantages.
Also, if you’re still trying to decide whether or not taking on reverse mortgage costs are worth it, use this guide’s tips as a starting point, and make sure to do your own research as well, in order to come to a conclusion.
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