Reverse Mortgage - Pros & Cons
A reverse mortgage is a tool - a financial tool that works great in the right situation. You wouldn’t use a high heeled shoe to hammer a nail would you?.... or Scotch tape to connect two electrical wires? You need the right tool (mortgage) that matches your plans for the future, your income, finances, and living situation. A reverse mortgage is one such tool that has it’s pros and cons. Let’s take a look.
Pros:
- No Monthly Mortgage Payments are required on a reverse mortgage - ever. (But you can make paymenst if you choose to!)
- You cannot outlive a reverse mortgage. Even if the loan balance is more than the home value or you have taken all the mones out of your line of credit - Neither is cause for the lender to begin foreclosure.
- No Minimum Credit Score requirements.
- No Income Requirements.
- All borrowers must take Independent Counseling prior to obtaining the loan to be sure that they understand the loan and are aware of possible alternatives to a reverse mortgage.
- Borrowers retain ownership of their home - The lender only has a lien on the property like any other loan.*
- There is never a Prepayment penalty. Loan can be paid off at any time or even refinanced without penalty. You can even refinance a reverse with a new reverse.
- Line of Credit cannot be rescinded by the lender, regardless of equity or home values.
- Line of Credit grows over time. This can be great for emergencies..
- You can choose to receive the funds in equal installments, in advances through a line of credit or otherwise, in lump sums, or through a combination of these options
- Non Recourse Loan - Any shortages at time of payoff due to value being less than amount owed are not a liability to the borrower or the estate.
- Flexible Options - Closed End Fixed Rate Reverse Mortgages available, Open Ended Adjustable Reverse Mortgages available. Both Standard and the new lower cost SAVER available.
- Interest Rates are close to traditional mortgage due to the fact these loans are insured byy FHA.
- Most Living Trusts are acceptable and title may remain in the name of the trust.
Cons:
- You children won’t inherit a free and clear home.* The loan will be due upon the death of the last borrower. Heirs have 6 months to 1 year to payoff the loan before lender will foreclose.
- If you should need to move to other housing, you may not have as much profit from the sale of your home due to the loan balance growing over time.
- Upfront FHA Mortgage Insurance Premium (MIP) on the Standard Reverse is 2% of the home value up to a maximum of $12,510.00 on the SAVER it is .01% of the Home Value.
- Loan Origination Fee - A Negotiable Fee regulated to a maximum of $6000
- Ongoing Annual FHA MIP is 1.25% of the outstanding principal balance-added to loan mount. (Effectively raises the interest on the loan by 1.25%)
- It is an age restricted loan - only homeowners over the age of 62 can obtain a reverse mortgage.
- Lower loan to values than traditional financing - you won’t find an 80% or 90% loan.
- Loan balance grows over time depleting your equity in the home.
- Loan can become due and payable if taxes, insurance or Property Owners Association dues become delinquent*
- Loan becomes due and payable when all the borrowers stop living in the home as their principal residence
- Reverse mortgage is not available for second home or rental property.
- Loan becomes due and payable if home is not maintained.
- Loan becomes due and payable if HOA Dues are delinquent and in default.
- Line of Credit can be frozen if borrower files for Bankruptcy.
- Estate Planning issues - If the property goes into probate, the heirs may not have the legal authority to sell the home in order to payoff the loan.
Great independent links:
Department of Housing - HECM Loans
National Council On Aging - Home Equity Advisor
Counseling Agency
If you would like to discuss any particular scenario and the suitability of a reverse mortgage for you, a loved one or a client, please feel free to reach out to me. I love brainstorming!
* These things are also true of traditional mortgages.
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