Reverse Mortgage Disadvantages
The elephant in the room…
We’ve addressed many excellent reasons to put a Reverse Mortgage in place.
However, for the sake of full disclosure, let’s review some Reverse Mortgage Disadvantages.
Accumulating Interest: A concern may be that your heirs (typically “the kids”) will inherit less equity when you die. Yes, this is usually true. But this is your home and it is there for your comfort; not your kids.
There are no monthly mortgage payments required (other than property taxes and insurance) and the balance of the loan can grow larger over time. Every month, the amount of interest owed is added and the balance (or payoff) is larger. These features are considered disadvantages by some, but the Reverse Mortgage program can be a huge advantage for those who want to stay in their home and improve their financial health.
On a side note:
I have met seniors who choose to intentionally live at a level of abject poverty for the sole reason to leave their children an asset upon their death. This truly blows me away and I have much to say on the matter and I won’t mince words.
To the homeowner: Really! Please reconsider. This is your home and your equity that by tapping into it will help you live more comfortably. Buy medicine. Eat something more than beans and rice. Catch a movie. Go to lunch with friends. You have a huge asset to tap into and there is no reason to live below your means. If your kids knew how you are intentionally suffering for them, they’d be stunned and saddened. Your children are now adults and are responsible for their own finances. When you die, you’re kids are not supposed to be winning the lottery.
To the kids: This really does happen and most of the time the family is clueless. When the family is aware of this sacrifice and they do nothing about it because they are looking forward to an inheritance, then SHAME ON THEM. (Sadly, I see this occur more than I once expected.) So, when I see a senior (usually Mom) that chooses to leave a “legacy” for her children, the vast majority of the time she is from the War Generation and was young during the Great Depression. There is a huge difference between the War Generation and the Baby Boomers in how they view money. Talk to your mother and explain to her that you really are fine and that her health, safety and comfort are important to you.
Reverse Mortgages are Complicated: They are not meant to be complicated… they are just different so it seems complicated. Comparing HECM’s to Conventional mortgages are like comparing apples and bananas. They’re both fruit, but very different.
Nationally, over 90% of seniors surveyed are happy they have a HECM loan. And, many of those who were not satisfied felt they didn’t have a thorough understanding of the HECM program. Because a Reverse Mortgage is unique, most lenders choose to not originate them. I applaud them for knowing their limitations and respecting the senior populous and providing good service by referring them to a specialist outside their organization.
Your lender should take the time to educate you about the process. If you do not thoroughly understand the program, then STOP and ask your lender or counselor to begin the process again. Never feel pressured or rushed. If you do, then find a better lender to work with!
You should look for a Loan Officer and Company that specializes in HECM Reverse Mortgages. For even more confidence, work with a Certified Reverse Mortgage Professional (CRMP). A CRMP will not let you go to closing unless they feel confident in your knowledge of the HECM program. Understand that by working with a CRMP you are working with the “cream of the crop”, so look for a lender with that designation in your area. CRMP is a special designation bestowed upon professionals by the National Reverse Mortgage Lender’s Association (www.reversemortgage.org).
They’re Expensive: They have a reputation for being expensive. However, on September 30, 2013, HUD made many changes to the program. One of the big changes was to the Initial Mortgage Insurance Premium charged by FHA and was typically the highest fee. In many circumstances, that fee was cut by 400%. However for others, the fee actually increased by 25% depending on the initial amount drawn at closing. Reverse Mortgages are now often less expensive than the Conventional loans that most people are familiar with. The initial mortgage insurance premium will either be .5% or 2.5% of the appraised value.
Yes, there are costs involved with obtaining any mortgage but most of the fees are rolled into the loan and are not out of pocket. And, any upfront cost (i.e., the appraisal) are often placed on a credit card and the homeowner may be able to be reimbursed at time of closing. By financing closing costs, a homeowner’s Principal Limit is reduced accordingly.
Not Enough Money is Received: You may be frustrated that a Reverse Mortgage doesn’t give you as much as your home is worth. Because the balance can grow over time, equity will be left in the property to absorb this growing balance. The loan amount (aka: the Principal Limit) is calculated by using the appraised value of your home, your age and interest rates. The Principal Limit amount is determined by a government formula.
Just because you are 62 years old and own a home does not mean that you’ll qualify. You must have a sufficient equity position to close on a Reverse Mortgage. This program is not for everyone.
The Bank Will Own the Home: THIS IS NOT TRUE. You retain ownership of the home and the home is passed to your heirs upon your death. The remaining equity belongs to your heirs; NOT THE BANK.
Over half the people that visit with me initially think that they are signing their house over to the bank. And they are still wanting to do the loan! Because of this I slipped this paragraph on to this page. Seniors are thrilled when I open their eyes to the reality that the bank does not own or even want their house. Banks are in the business of earning interest; not acquiring real estate.
Every day I wonder how many people flat out refuse to consider the benefits of a Reverse Mortgage because they think they are giving up their homes?
In Conclusion: Only you can determine if the advantages outweigh the disadvantages. We educate and guide so you can make the decision that is right for you and one with which you are comfortable.
–Mace Kochenderfer, CRMP (NMLS # 213789)
New Mexico Reverse Mortgage… Helping you move forward, in Reverse.
These materials are not from HUD or FHA and were not approved by HUD or a government agency.