Disadvantages of Reverse Mortgages

Disadvantages of Reverse Mortgages

One of the products gaining some traction in recent years is the reverse mortgage. Reverse mortgages are becoming increasingly popular as retirees look for ways to improve cash flow by tapping into home equity. Since a reverse mortgage is a form of debt, we thought we’d examine them in more detail and look at some of the disadvantages of reverse mortgages.

What is a Reverse Mortgage?

Basically, a reverse mortgage is a type home equity loan. However, unlike “regular” home equity loans, a reverse mortgage doesn’t require that you have income or particularly good credit (although lenders have the option of checking). With the reverse mortgage, it’s all about the equity in the home. In most cases, you need to have the mortgage mostly paid off to participate.

You receive the money from the loan – you can choose lump sum, regular installments, or line of credit – but you don’t have to make payments on it. Instead, if you want, the loan doesn’t need to be repaid until you move out of your home or die. In most cases, the proceeds from the sale of your home are used to repay the loan.

Because reverse mortgages are aimed at retirees, there are age requirements. In order to qualify for a FHA reverse mortgage, at least one homeowner needs to be 62, although some banks offer non-FHA reverse mortgages to younger seniors. The home should also be your primary residence. Once the home stops acting as your primary residence (including if you move to a long-term care facility), you usually have to start repaying the loan.

Downsides to the Reverse Mortgage

Because reverse mortgages don’t come with income requirements, you will likely pay higher fees and interest on these loans. The amount that you actually receive might be surprisingly low. Reverse mortgages are notoriously expensive.

Another drawback is the fact that you probably won’t be able to leave your home to your heirs. If you want to leave your home to your posterity, a reverse mortgage can effectively put an end to that idea. Once you die, the home either has to be sold to repay the loan, or your heirs have to use your estate to pay off the loan, reducing their inheritance.

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Is a Reverse Mortgage a Good Idea?

In many cases, a reverse mortgage isn’t worth it, because of the reasons stated above. If you really feel as though you have no other option and need cash for your retirement expenses, and if a large portion of your net worth is locked up in your home, then a reverse mortgage might be worth considering. But you should be aware of the drawbacks and disadvantages first. Keep in mind that if you do decide on getting a reverse mortgage, you may want to get a FHA reverse mortgage, because with an FHA reverse mortgage there are certain protections, such as the requirement that a lender can’t force repayment of amounts that exceed the market value of the home (so if the house’s value drops, the lender takes the loss).

However, the expense of the reverse mortgage still makes it a dubious source of retirement funding. Additionally, in some cases payment can come due even if you are still living if you no longer meet the residency requirements. That can strain your finances as you try to begin repaying the loan or it may force you to sell the home.

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  • John S @ Frugal Rules

    Good post. I think a big problem with Reverse Mortgages is that very few are really informed in regards to them. You add to that you have celebrity pitchmen hawking them and you get a potentially dangerous combination.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Yes, I think there is a lot of misinformation about reverse mortgages out there. And the television advertisements often don’t help! Glad you liked the post.

    • Peacherino

      Those star pitchmen should be ashamed. The homes lost by seniors due to the bull they spout on TV is bait-and-switch. DO NOT DO THIS UNDER ANY CIRCUMSTANCES.

  • http://www.debtroundup.com/ Grayson @ Debt Roundup

    I have never like the idea of reverse mortgages. I think they are a horrible idea that really messes what someone can do with their home, something they have worked hard to pay off over the years.

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Agreed! If your home is an investment, it’s best to avoid losing your equity (that you worked hard to earn) in the home. Thanks for your comment.

  • http://www.kgaction.com/ Mary Kaplan

    I have heard of reverse mortgages, but never really understood them. Your post is clear and concise! I think when I am a senior needing money to live, if I have almost paid off my house, I would probably sell it, get the cash and move into a rental that fits my needs at the time. So often we continue living in a large house because we own it, even though we could comfortably live in a quarter of the space!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      I’m glad you found the post helpful! And yes, I think securing the equity you’ve built up rather than losing it is a really good idea.

  • Debbie

    Do you have any help with this situation: a husband (over 62yr) and wife (younger than 62yr) took out a rev. mortgage on their home a few years ago and now the husband has passed and the bank is saying that the widow must payback/sell the house within one month! The widow has no money or income. HELP!

    • http://www.twitter.com/bwfeldman Benjamin Feldman

      Oh no, that sounds like a very difficult situation. My understanding is that if the woman’s name is listed on the reverse mortgage then her bank shouldn’t be able to kick her out of the house. It might be worth complaining to local authorities, complaining to the CFPB, and perhaps even calling local news stations to get some media attention to put pressure on the bank to do the right thing.

      • Craig Lindstedt

        If she is under age 62, she would not be on the mortgage. Besides, in this market, you have up to 12 months to sell the property as long as you can show that you have the property on the market and are making an attempt to sell it at a fair price, not over priced so it wouldn’t sell. They had to know the risk going in before the closing of the Reverse Mortgage. They must take a class by an approved company talking about the pros and cons of a Reverse Mortgage and they receive a certificate stating that they understand the Reverse Mortgage. I had a customer that was is the same type of problem, she was under the age of 62 and she could not be on the mortgage. If he would die or move into a nursing home she would be forced to sell the property and pay off the mortgage. She understood the risk she was taking. The bank is doing the right thing, she is not on the mortgage and she must sell or take out a new mortgage in her name to pay off the Reverse Mortgage. The bank sold the mortgage to the FHA, it is the rules of the FHA that the bank must follow. Craig Lindstedt, Reverse Mortgage Specialist, WI, CO, NJ, IL and FL. NMLS #382813

        • http://www.twitter.com/bwfeldman Benjamin Feldman

          This is interesting background information. Thanks for sharing, Craig.

    • Andrea

      Well I’m glad my reverse didn’t fall through. I just got declined
      because I had some liens on the property and one would not subordinate
      to the other, not to mention I had a terrible appraisal which valued the
      property less than what it actually was. Everything happens for a
      reason. Thank God! I’m glad I found this article. I was hoping if I
      got it to take a Life Insurance policy out so that my children could
      keep the house, but the hidden loop holes, that which the counseling
      session didn’t cover.

      I wouldn’t suggest a reverse, after reading this.

      • http://www.twitter.com/bwfeldman Benjamin Feldman

        I’m glad this article is helpful, Andrea! Best of luck to you.

  • oil executive

    You are better off to sell your home and use that money to live in a assisted living home for Seniors.

    • guitarjet.

      And senior assisted living homes don’t suck the life out of any money you might have? Please. Not everyone is an oil executive. And selling your home and downsizing? In many cases that is sage advice. I just did that and got a paid off residence for it. But, I had to use the equity from the big house to buy the smaller house. Just selling your existing home isn’t the end of the story. You have to buy something else, or become a renter for the rest of your life. Thus, you end up with very little money. I could live with that were I alone, but that’s not the answer for everyone. Not everyone wants to amass a whole lot to leave behind. Not everyone has heirs, or heirs that want for anything. Why not improve your quality of life? No, it’s not for everyone, but to say it’s not for anyone intimates that you know a whole lot more than you actually do.

  • SLUGG0

    I’m 65 with no spouse, no children and my relatives are very well off compared to me. My income from Social Security and the drawdown from my IRA leave me comfortable. However my neighborhood is “changing” and I expect in the next 10 years or so it will cause a severe drop in real estate prices. I don’t want to move as I’ve been in my home for 30 years and expect to remain here until the end.

    Why should I NOT take out a reverse mortgage today while interest rates are low and housing prices high? I would like to add a small addition to my rancher and update my appliances, heater and air conditioning.

    • http://www.narno-br.com Alberto Narno

      I´d take it but under FHA, have a good 1

    • Peacherino

      Because right off the top, you are charged $10,000, then each month around $50 “handling fee”. Before four years are up, YOU HAVE LOST YOUR PROPERTY

  • Ron04

    This is a terribly biased article. While a reverse mortgage is not for everyone, it fills a specific need that allows countless seniors to live with peace of mind and dignity in their own home while having the financial burdens removed allowing them opportunities they otherwise would not have.

    YES there are costs and fees associated with reverse mortgage products that don’t exist with traditional mortgages. Are they excessive or prohibitive? That’s up to each individual borrower to decide. There are so many safeguards in place, including mandatory third party counseling from a HUD approved agency separate from the lender, that its unlikely anyone would be taken advantage of.

    Rational and methodical decision making, coupled with adequate research will dispel any negative myths. This product is NOT for everyone, but for some, it’s a blessing and a godsend.

    • Stephen (CLT)

      what happens when you out-live your home equity?

  • Stephen (CLT)

    never…never..never do a reverse mortgage!
    when you let the bank determine your financial well-being, it is not good. they will suck the money out of you till you give the house up. if you must, sell the current home and move to a smaller home; that will give you some extra spending money.

  • richathor2 .

    Assisted living facilities cost $5000.00 a month. That is based on
    what type of assistance you require in order to maintain your standard of living.

  • Ron Kokish

    Good heavens – at the bottom of this article discouraging reverse mortgages is an advertisement touting. . . .? You guessed it! Reverse mortgages.

  • Bubble52

    I am 62 and my wife is 65. We have 11 years before our home is payed off. We are considering a reverse mortgage so that we can do some of the things that we are not able to do now.plus retirement is coming soon..What are your thoughts

  • Dave Telling

    I don’t have a reverse mortgage, but I’m considering it. I recently lost my job of 32 years as an engineer, and the likelihood of finding another F/T job in that field, where I now live, is pretty much zero. I am hoping to obtain some contracting work, but since I am almost 64, I’m getting close to retirement age, and our house is almost paid off. Things may get sticky, income-wise, in the next couple of years, and the idea of a reverse mortgage line of credit sounds like a decent backup plan. I was a bit surprised to see comments about “losing your equity”. You don’t lose your equity, you USE your equity right now with a reverse mortgage. Whatever you borrow is obviously subtracted from whatever the home sells for after you die, but if you are not worried about leaving your home to your heirs, and would like to be able to have a bit more comfort while you are still here, it is hard to understand all of the negativity that is written on this issue. Using a reverse mortgage as a line of credit gives you the ability to access cash quickly if needed, and if you don’t use the LOC, you don’t build up a balance that needs to be repaid, so if/when you sell your home, you recover the vast majority of your equity. I would agree that an FHA-guaranteed loan is the way to go, but just like a lot of other credit/debt scenarios, not everything is “all good” or “all bad”.

  • zimexlady

    The FASTEST way to lose your home is with a Reverse Mortgage. Within 40 months, I owed more than the condo was worth. FRAUD
    I lost it to repossession. I had paid cash five years earlier for it. DO NOT DO THIS. Paid $79K owed $81K in less than four years. Fees are horrid. You will NOT leave this property to your heirs

  • Nancy

    We’re considering this to avoid the problem of our 7 children having to deal with the house. We are 83 and 74 and owe more than 50 percent. One son has offered to pay down the mortgage for us to qualify to “unload” the house. Our plans are to stay in our home but who knows ? Any comments?