If you are a senior homeowner with existing home equity in your property (calculated by taking the home value and subtracting what is owed on the loan/mortgage) a reverse mortgage is a great option if you are in need of cash (or struggling to make ends meet). HECM reverse morgages have helped 1M+ seniors and they are not a scam!
If you have other sources of income, savings, family help… read this article to see if it’s something you should just avoid all together to save time and to have more equity to pass down to your heirs.
Why Seniors Should Avoid a Reverse Mortgage
A reverse mortgage is a type of loan that allows homeowners who are 62 years or older to convert some of the equity in their home into cash. The loan does not require monthly payments and is repaid when the homeowner sells the home, moves out, or passes away. While a reverse mortgage may sound like an attractive option for seniors who need extra income or cash flow, there are also many reasons why seniors should avoid a reverse mortgage. Here are some of the drawbacks and risks of a reverse mortgage that seniors should be aware of before applying for one.
## High Costs and Fees
One of the main disadvantages of a reverse mortgage is that it can be very expensive to obtain and maintain. A reverse mortgage involves upfront and ongoing costs and fees, such as:
• Origination fees, which are charged by the lender for processing the loan application and can range from 2% to 6% of the home value or loan limit, whichever is lower.
• Closing costs, which are similar to those of a regular mortgage and can include appraisal fees, title fees, credit report fees, recording fees, and other charges.
• Mortgage insurance premiums, which are paid to the FHA to insure the loan and protect the lender in case the loan balance exceeds the home value. The initial premium is 2% of the home value or loan limit, whichever is lower, and the annual premium is 0.5% of the loan balance.
• Servicing fees, which are charged by the lender for managing the loan account and can be up to $35 per month.
• Interest rates, which are added to the loan balance every month and can vary depending on the type of reverse mortgage (fixed or adjustable) and market conditions.
These costs and fees can add up to thousands of dollars over time and reduce the amount of equity that seniors have in their home. Depending on how long they live in their home after getting a reverse mortgage, they may end up paying more in interest and fees than they receive in cash.
## Reduced Home Equity and Inheritance
Another drawback of a reverse mortgage is that it can reduce the amount of equity that seniors have in their home over time, as interest and fees accumulate on the loan balance. This means that they may have less money left for their heirs or for other purposes when they sell their home or pass away. A reverse mortgage also has implications for spouses, partners, roommates, and heirs who may live in or inherit the home.
If a senior has a spouse or partner who is not a co-borrower on the reverse mortgage, they may not be able to stay in the home after the borrower passes away or moves out, unless they can pay off the loan balance or qualify for a new reverse mortgage. If a senior has a roommate who is not a co-borrower on the reverse mortgage, they may have to move out when the borrower passes away or moves out, unless they can pay rent to the lender or buy out their share of
the home. If a senior has heirs who want to inherit the home, they may have to pay off the loan balance or 95% of the appraised value of the home, whichever is less, within six months after the borrower passes away or moves out.
Loss of Benefits and Eligibility
A third disadvantage of a reverse mortgage is that it can affect a senior’s eligibility for certain public benefits, such as Medicaid or Supplemental Security Income (SSI), if it increases their income or assets above certain limits. Medicaid and SSI are means-tested programs that provide health care and cash assistance to low-income individuals who meet certain criteria. If a senior receives cash payments from a reverse mortgage, they may have to spend them down within the same month to avoid losing their benefits or eligibility. If a senior receives a line of credit from a reverse mortgage, they may have to report it as an asset and keep it below certain thresholds to avoid losing their benefits or eligibility.
Exposure to Abuse and Fraud
A fourth disadvantage of a reverse mortgage is that it can expose seniors to abuse and fraud by unscrupulous lenders, agents, contractors, or family members who may try to take advantage of their situation. Some common scams and abuses that seniors should watch out for include:
• High-pressure sales tactics that pressure seniors into getting a reverse mortgage that they do not need or understand.
• Misleading advertising that promises seniors free money or no payments with a reverse mortgage.
• Cross-selling that persuades seniors to buy other financial products or services that they do not need or want with a reverse mortgage, such as annuities, insurance policies, or investments.
• Contractor fraud that convinces seniors to use their reverse mortgage funds to pay for unnecessary or overpriced home repairs or improvements.
• Identity theft that steals seniors’ personal information and uses it to apply for a reverse mortgage without their knowledge or consent.
• Financial exploitation that coerces seniors into giving up their rights or access to their reverse mortgage funds by family members or caregivers who may have ulterior motives.
Limited Options Down The Road
A fifth disadvantage of a reverse mortgage is that it can limit a senior’s options down
the road if they want to move to another home, an assisted living facility, or another location. Generally, a reverse mortgage must be paid off when the borrower sells their home or moves out. This means that they may not have enough equity left in their home to buy another one or pay for other housing expenses. They may also face difficulties in qualifying for another loan if they have low income or poor credit history.
## How To Avoid The Risks Of A Reverse Mortgage
While a reverse mortgage may seem like an easy way to access some of the equity in your home without selling it right away, it can also come with many risks and drawbacks that you should consider carefully before applying for one. Here are some tips on how to avoid the pitfalls of a reverse mortgage:
• Do your homework: Research different types of reverse mortgages and compare different lenders’ offers and terms. Use online calculators and tools to estimate how much money you can get from a reverse mortgage and how it will affect your equity over time. Read all the documents carefully and ask questions if you do not understand something.
• Seek professional advice: Consult with a financial planner or counselor who can help you evaluate whether a reverse mortgage is right for you and how it will fit into your overall financial plan. You should also consult with an attorney who can help you understand your legal rights and obligations under a reverse mortgage contract.
• Shop around: Shop around for different lenders who offer competitive rates and fees on reverse mortgages. Do not fall for high-pressure sales tactics or misleading advertising from lenders who may try to take advantage of you. Check their reputation and credentials with consumer protection agencies such as the Better Business Bureau (BBB) or your state attorney general’s office.
• Consider alternatives: Consider other alternatives to access your home equity besides a reverse mortgage, such as selling your home outright, downsizing to a smaller home,
renting out part of your home,
taking out
a home equity loan
or line
of credit,
or applying
for other programs
or benefits
that may help you
with your financial needs.
Summary
A reverse mortgage
is
a type
of loan
that allows homeowners
who are 62 years
or older
to convert some
of
the equity
in their home
into cash.
A reverse mortgage
has some advantages,
such as providing extra income
or cash flow
without requiring monthly payments
or affecting ownership
of
the home.
A reverse mortgage
also has many disadvantages,
such as high costs
and fees,
reduced home equity
and inheritance,
loss
of benefits
and eligibility,
exposure
to abuse
and fraud,
and limited options down
the road.
Seniors should avoid
a reverse mortgage unless they have done their homework,
sought professional advice,
shopped around,
and considered alternatives.