Reverse Mortgage Pros and Cons
What Are the Cons?
In this case, let’s start with the downsides. Reverse mortgages can be expensive loans. In the past, borrowers almost always had to pay not only an origination fee but also the Up-Front Mortgage Insurance, and those initial costs can be staggering to some.
Also, there are many ways to take your funds with a reverse mortgage, and since the loan balance grows over time, the fees are based on the principal lending limit or the property appraised value, whichever is less. However, one of the best things about a reverse mortgage is that with the recent HUD changes to the program, if you are not taking 60% or more of your total Principal Limit at the initial closing or in the first 12 months, the Initial Mortgage Insurance Premium (IMIP) cost comes down considerably.
If, however, you are paying off an existing loan or have other liens that you must pay off that will make your starting loan balance 60% or more of the total Principal Limit or benefit amount available to you for your age or property value (HUD now calls this your “mandatory obligations”), then your IMIP can still be a substantial sum.
Homeowners do not have to pay this money out of pocket up front, but it is added to the loan balance. That means if the borrower is not looking for a long-term solution, a reverse mortgage is probably the last loan he or she should consider when the costs are higher.
Another possible negative of a reverse mortgage is for seniors who are not paying off a current mortgage but take enough of their funds up front for various purposes that might affect other eligibility that they currently receive.
Older Americans need to concern themselves with eligibility requirements for some need-based programs such as Medicaid and what the effect of having additional money in their accounts would have on their eligibility.
Unlike the old program parameters that would allow borrowers to take a lump sum of all funds up to the full benefit amount or Principal Limit at closing even if there were no liens to pay off, the new program limits the amount that borrowers can take at closing or in the first 12 months based on their mandatory obligations.
However, borrowers still need to be judicious about not taking too much money as the interest on their loan accrues faster than interest will accrue in a bank account at the low rates that borrowers earn on savings.
Something also to watch is that there are always unscrupulous folks looking for a way to separate seniors from their money. Whether it be with a bad investment or just someone looking to steal from the senior, a trusting senior with a lot of cash is a tempting target.
Too often we see the horror story of a borrower who gets convinced that a family member’s business is a surefire investment, only to realize too late that it was anything but. The money is lost and the borrower feels it was the reverse mortgage itself that failed.
In August of 2014, HUD eliminated the temptation to remove a younger spouse from a home title to obtain more money on a reverse mortgage when it implemented guidelines that now require the age of a younger spouse to always be considered when granting a reverse mortgage.
Previously, if the older spouse was the only one on the loan and then had to leave the property due to moving to a care facility or passing, then the loan would be called due and payable and the younger spouse often had to leave the property at a very difficult time in their life.
Now younger spouses who are not 62 have a deferral period for as long as they live in the home even after the passing of the older spouse. As such, the younger spouse is protected (but the original amounts that these borrowers receive on the loans are also lower, taking into consideration the younger spouse’s age).
One thing that borrowers need to be aware of is that the borrower is still responsible for the payment of the taxes, insurance and for the upkeep of the home. If the reverse mortgage will only pay off an existing lien, but the borrower’s means will not maintain the property and the borrower’s necessary lifestyle, the reverse mortgage is not a good long-term solution.
No one wants to think about selling a home they love and subsequently downsizing, but if you realistically will not be able to pay for all your needs, keep your taxes, insurance and maintenance on the home current and still put some money away for later, then a reverse mortgage that only pays off the loan on your current home is probably not the answer.
There comes a time when you must ask yourself if you are just delaying an inevitable time when you will not be able to pay taxes or other expenses. If that is so, then there may be other options with a purchase reverse mortgage that I will discuss later. The time to consider these loans is before you have no alternatives.
What Are the Pros?
A reverse mortgage allows senior borrowers to live for the rest of their lives in their home with no monthly mortgage payments, because the debt is repaid when you leave the home. The home can be financed or owned free and clear and you can still obtain a reverse mortgage.
Unlike with conventional mortgages, you do not have to make monthly payments for a reverse mortgage, meaning you do not have to meet the same qualifications as you would for a forward mortgage.
With a reverse mortgage, you always own your home, while you or your heirs dispose of the property just the same with a reverse mortgage as you would with any other home loan. Reverse mortgage proceeds are tax free, and you can use the money for any purpose you choose. You can modernize or alter you home for comfort. You can pay for medical expenses, travel or other recreation. You can use the money for your grandchildren’s college. It’s your home, your money and your choice!
The key here is that the loans are insured by the government. Homeowners, therefore, are guaranteed to always have the funds available to them. If the lender does not pay funds to the homeowner in a timely manner, the bank owes the homeowners a late charge!
HUD guarantees that as long as you have funds left in your line of credit, you will always have them available. That is very comforting when banks have frozen lines of credit, eliminating the ability for borrowers to draw on them just when they needed to or have eliminated the loan entirely on normal Home Equity Lines of Credit.
And finally, no matter how long you live in your home, and no matter how much money you take from it in payments or what happens to the real estate values, you and your heirs can never owe more than the property is worth and your heirs can choose to pay the loan off at 95% of the current value if that is less than the amount owed, should they wish to keep the home. Many homeowners today are still upside down on values, although thankfully the recent increases in value have started to eliminate that problem.
Regardless of what happens to values in the future, this can never happen with the HUD Home Equity Conversion Mortgage, otherwise known as the government reverse mortgage, even if values drop again.
Finally, you can use a reverse mortgage to either purchase a home or refinance the home you are in. This has proved an invaluable option for borrowers over the age of 62 for a few reasons:
- Moving to lower your costs (as we discussed above)
- Moving to find a home that better suits your needs later in life
- Moving because your current house no longer best suits your lifestyle
In the past, this demographic of home buyer typically had to pay cash for a new home because income may not support house payments and traditional loans may not be available. Borrowers who did not have the ability to pay cash, or did not want to use all the money they had coming from the sale of their existing home just to purchase the next home, can now buy their new home using about half of the purchase price as the down payment without ever having to make a mortgage payment.
This works extremely well for people in three scenarios:
- Those who want to buy a home
- Those who need to get a home that will better suit their needs
- Those who need to lower their expenses
We have seen reverse mortgages do some great things for some people who really wanted and needed them, but only you in conjunction with your trusted financial advisor and family can tell if this is the right loan for you. Between the refinance and the purchase options, borrowers age 62 and over have more choices than ever before so maybe a reverse mortgage is worth a second look for your circumstances.