A reverse mortgage is a special kind of mortgage loan whose security is a residential property. This loan enables retirees to have some additional income based on the unencumbered value of their properties. In most cases, a reverse mortgage can be useful to seniors who would like to depend on their home’s equity to survive, especially when they have limited cash generation options.
However, this kind of loan also has some associated disadvantages that can have a negative effect on a homeowner’s equity. So let’s get down to business and have a look at five main reasons why a reverse mortgage may not be the best choice:
Inheritance can become an issue
When a homeowner passes on, their spouse or estates would typically be the ones to repay the loan. This may entail selling the home to raise the required cash, as put by the Federal Trade Commission. If the house, by good luck, is sold at a price higher than the outstanding loan balance, the extra funds are transferred to the heirs.
If, however, the cash raised from selling the home is not enough to cover the loan balance, FHA insurance clears the remnant, but the heirs get nothing. For this reason, it’s so important for borrowers to pay mortgage insurance premiums if they have taken out a reverse mortgage loan.
Also, a reverse mortgage can cause issues if you wish to leave your home to your children, especially if they don’t have enough funds to clear the loan. Even though a fixed rate forward mortgage can be a funding solution for your children so that they retain ownership of the home, they may not always qualify for such a loan. That may leave them with no option other than allowing the sale of your cherished family home to clear the reverse mortgage debt.
It becomes complicated if you live with someone
If you live with your relatives, friends, or even roommates, it becomes risky for them if you pass on – they could end up homeless just like that. Besides, such individuals may be required to vacate the property should you stay away from your home for more than a year. This is in consideration that reverse home mortgages require a borrower to continue living in their home, as it’s considered their primary residence.
A loan also becomes due immediately a borrower sells his home, moves out, or by bad luck passes on. You have a solution to this one though – just include the individuals living with you on the loan paperwork. You, however, need to note that any boarder under the age of 62 does not qualify to be a borrower on a reverse mortgage.
Medical issues can be a threat
If a senior has health issues, they can opt to take out a reverse mortgage so that they can clear their bills. They, however, have to be healthy enough to continue living in the home as their permanent residence. If their health deteriorates to a point where they have to relocate to a treatment facility, the loan must be fully settled since the home is no longer considered as the senior’s primary residence. Under reverse mortgage regulations, if one moves out of their home for more than 12 sequential months, the move is considered permanent. To avoid foreclosure, the borrower has to write every year to certify that they still live in the home.
Moving is hectic
If you have plans to move, whether for health concerns or any other reason, a reverse mortgage may not be a good option for you. That’s in consideration that the costs involved in such a process are at the very best considered impractical. Such costs can include initial mortgage insurance costs, settlement (closing costs), inspection fees, ongoing mortgage insurance costs, and others. If a homeowner decides to vacate suddenly or sell the property, they have only six months to clear the loan. Even if the borrowers get sale proceeds that are above the loan balance, they will have used a lot of cash to settle the reverse mortgage costs.
The costs are high
Even though one may receive reverse mortgage proceeds, the cash is normally not enough to pay for property taxes, home maintenance costs, as well as homeowner’s insurance premiums. If a homeowner does not stay current in such areas, the lender may decide to call the loan due, putting the borrower at a high risk of losing their property.
To some homeowners’ relief, however, some areas have property tax deferral programs which are aimed at supporting seniors with their cash-flow. Some cities also have programs that are geared towards helping low-income seniors complete their home repairs. However, such programs don’t exist for homeowner’s insurance.
Major points to note are:
- If you wish to have your home owned by your children after you pass on, a reverse mortgage may cause some trouble if the heirs lack enough cash to clear the loan.
- Obtaining a reverse mortgage means that you have to live in the house failure to which the loan can be nullified or even lead to foreclosure.
The Bottom Line
If your financial status is not so good, you may have wanted to consider getting a reverse mortgage loan, but having considered the points above, you may want to think twice about it. Should you feel that a reverse mortgage is not such a good option, you might want to consider selling your home and moving to a smaller house. You also have the option to rent a home, but that too has some downsides such as having to deal with property taxes, repairs, and more.
Still, you can decide to use other options such as acquiring home equity loans, using a traditional forward mortgage to refinance, or using a home equity lines of credit. Before making any decision, it’s always advisable that you research and get additional advice from financial experts where applicable to avoid making decisions that may get you into a financial trap.
