Reverse Mortgages: Pro's and Con's

I can almost hear it now, “This is an article written by a guy who does reverse mortgages? There probably won’t be any con’s”! As passionate as we are about the reverse mortgage product, there are some drawbacks in some instances and we make certain that we point out the pro’s and con’s to all reverse mortgage applicants.

As great as this product is, it is not right for everyone and it is always the best idea to know your goals and to have the help and support of your family and a trusted financial advisor.

In this case, let’s start with the con’s. Reverse mortgages are expensive loans. Because you have to pay not only an origination fee but also the HUD Up-Front Mortgage Insurance, the 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.

As an example, the owner of a $417,000 value property in Florida (the new national limit) where the tax stamps are high can expect to pay somewhere in the neighborhood of $18,000 in fees and insurance for their loan.

They do not have to pay this money out of pocket up front, but it is added to the loan balance and so if the borrower is not looking for a long term solution, a reverse mortgage is probably the last loan that should be considered. Another possible negative of a reverse mortgage is for seniors who are not paying off a current mortgage but take all their funds up front for various purposes and it is two-fold.

Firstly, seniors need to concern themselves with eligibility for some need-based programs such as Medicaid. By placing all their reverse mortgage proceeds into a bank account at one time, seniors could make themselves ineligible for necessary programs and so this should always be kept in mind when determining how to take your funds.

Secondly, many unscrupulous folks are always looking for a way to separate seniors from their money. Whether it be with a bad investment (and bad can be defined as risky or one that cannot be accessed for long periods of time without penalty which the senior borrower may not have) or just someone looking to steal from the senior, having a lot of cash is a tempting target and many seniors are too trusting.

Some couples find that they will receive more money by removing the younger borrower from the title and using only the older borrower. Unless there is adequate insurance or other arrangements have been made upon the passing of the older spouse, we do not recommend this course of action due to the fact that the younger spouse would then be left with a balance for which they probably could not qualify for a reverse mortgage of their own and they would be forced to move.

Now the pro’s! A reverse mortgage allows senior borrowers to live for the rest of their lives in a home with no mortgage payments. The home can be financed or owned free and clear and the borrowers can still obtain a reverse mortgage. There are no income or credit requirements to meet. Unlike conventional forward mortgages, borrowers do not have to make monthly payments so they do not have to qualify like forward mortgage borrowers.

Borrowers always own their home and borrowers or their heirs dispose of their property just the same with a reverse mortgage as they would with any other home loan. Reverse mortgage proceeds are tax free, and borrowers can use the money for any purpose they choose. Borrowers can modernize or alter their home for comfort. They can pay for needed medical expenses, travel or other recreation, they can use the money for grandchildren’s college, or any purpose they choose. It’s your home, and your money.

There’s never a monthly mortgage payment so as long as the senior homeowner lives in the property, they never have to worry about where they will get the money to make the payments. The loans are government insured and therefore, the senior homeowner is guaranteed to always have the funds available to them, and if the lender does not pay funds to the homeowner in a timely manner, the bank owes the homeowner 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 are freezing lines of credit daily 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 the real estate values do, you and your heirs can never owe more than the property is worth. Many homeowners today are upside down on values as values have dropped but this can never happen with the HUD Home Equity Conversion Mortgage…otherwise known as the government reverse mortgage.

As with any product, knowing whether or not a reverse mortgage is right for you is a matter of education and looking at your individual circumstances. 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.

Reported from Reverse Mortgages Pros and Cons.