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.

Consolidate Debts
Consolidate Your Debts
Save thousands and pay off your high interest debt with a low, fixed rate loan via LendingClub. Rates from 6.78% to 29.99% APR: Best APR is available to borrowers with excellent credit. Check Your Rate

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.

Image credit: Moyan_Brenn_be_back_on_Jan_20th

Have you tried ReadyForZero yet? It's a free online tool for paying off debt.

Try it now

Receive updates:      
You can always unsubscribe by clicking on the link at the bottom of each e-mail.

  • 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.

  • 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.