This is a question that is asked on a regular basis by many senior homeowners that are contemplating the idea of taking out a Reverse Mortgage on their home. It appears that as more and more people are reaching the age of 62 many of them are looking into what the possible Reverse Mortgage disadvantages could possibly be.
In this article I will address all the possible disadvantages of the Reverse Mortgage program in detail with simplicity and clarity that is lacking on many websites out there today. Since there are a multitude of websites on the Internet dedicated to providing free information, one cannot always be certain whether or not the site they are visiting contains accurate or misleading information. Many sites created to providing information to the public were not created by, nor do they have content that comes from experienced professionals in that particular industry. This could not be more true when it comes to finding out the disadvantages of getting a Reverse Mortgage.
First and foremost, the biggest Reverse Mortgage disadvantage is the up front closing costs and Mortgage Insurance Premiums. Reverse Mortgages are insured by the FHA (Federal Housing Administration) and they charge 2% up to a max of $12,510 (if your home appraises for or above the maximum amount of $625,500) of the property value up front just to get the loan and 1.25% per year that you have your Reverse Mortgage in place.
Reverse Mortgages do not require monthly payments, so a homeowner does not experience the 1.25% cost on a month to month basis, but it will get added with interest on the outstanding balance. This however, is the only true difference in closing costs between a Reverse Mortgage and a standard loan. All other fees associated with a Reverse Mortgage loan are in line with a traditional conventional loan.
The up front costs are a disadvantage on the Reverse Mortgage when you do not plan to stay in your home for a considerable amount of time. Basically, those who are looking for a short term solution should look into other available options first. If a homeowner is not looking at the Reverse Mortgage as a temporary fix to a situation, and plans to reside in the home for the rest of their life, the up front costs are offset by the length of time the loan is in place. The longer you have the Reverse Mortgage and the more months you are "mortgage payment free" the more affordable the Reverse Mortgage becomes. (Use this Reverse Mortgage Calculator to estimate your available reverse mortgage loan)
Another major Reverse Mortgage disadvantage is how certain needs based programs can be affected such as Medicaid and SSI (not to be confused with Social Security). Standard Social Security Benefits are not affected by obtaining a Reverse Mortgage. If you are receiving such assistance based programs, a Reverse Mortgage could disqualify you for these programs due to the possibility of having additional funds in your bank account that you would receive from the loan. However, having the Reverse Mortgage does not automatically disqualify such programs.
For example, a homeowner could qualify for a Reverse Mortgage to pay off their existing lien that they were making monthly payments on and if they receive no cash at closing to deposit into their bank account they would still be eligible for those programs. Programs like Medicaid and SSI are based on an individual's "liquid assets" such as checking and savings accounts. If there is no increase in a person's liquid assets and merely just an elimination of an old mortgage with a new mortgage, needs based programs are not affected.
Additionally, occupancy requirements can be a Reverse Mortgage disadvantage as well. Reverse Mortgage loans require that the property be your primary residence where you reside for the majority of the year. Those who are avid travelers or own multiple properties and spend varying times in multiple locations must consider this as a disadvantage to the Reverse Mortgage because it would limit the amount of time one could spend away from their main home.
For example, if John Doe owns a home in New York and a vacation property in Florida and wanted to spend a year at the Florida property it would affect his Reverse Mortgage loan. Also, if someone's health is deteriorating and is looking into an assisted living facility in the near future, the occupancy requirements would also be a disadvantage to the Reverse Mortgage. If the last remaining or sole occupant of the property to the Reverse Mortgage loan has to leave the property for an extended period (1 year or longer) the Reverse Mortgage could be called due and payable. Good news here is that as long as one party to the Reverse Mortgage still resides in the home as their primary residence, a secondary borrower could in fact leave the property for extended periods of time.
Finally, the last Reverse Mortgage disadvantage relates to the heirs of the estate. If a homeowner who is looking into a Reverse Mortgage has an heir or heirs to their estate and it is vital that they leave them the property with maximum equity in it for future prosperity and well being, the Reverse Mortgage could be an issue. The reason for this is that since you are not making monthly mortgage payments on the loan, the balance is rising on a monthly basis as the outstanding balance accumulates interest and mortgage insurance.
Because of this, there is the possibility that there might not be any equity in the property at the time the loan is due. This seems to be an important issue to those who have disabled or "special needs" children that are residing in the home that the potential Reverse Mortgage candidate is taking care of. However, Reverse Mortgages are Federally Insured and are "Non Recourse" loans. This means that you can never owe more than the house is worth at a maturity event. For Example, Jane Doe had a Reverse Mortgage on her home for 20 years when she passed away. At the time of her passing, the outstanding balance on her loan was $600,000 but the home was only worth $500,000 due to falling real estate prices.
In this sample scenario, the heir of her estate would not be obligated for the additional $100,000 if the property were sold for $500,000. In addition to this, the heir could opt to put it all back on the bank that held the note if the selling of the property were going to be a major time constraint (especially if no proceeds are to be gained). In this scenario, the Federal Government would cover the Lender's loss at the time of the sale of the property. In a scenario where there was equity in the property at the time of Jane Doe's passing, the heir or heirs would sell the home to pay off the mortgage balance and then receive the remainder of the proceeds from the sale of the property as they would under any other circumstances if their Mom had a traditional loan in place. Also, there is always the option of refinancing the Reverse Mortgage with a new loan in order to keep the property in the family if that was the will of the heir as well.
The disadvantages to the Reverse Mortgage that have been listed above should be known by all who look into the Reverse Mortgage program and be factored into their decision on whether or not a Reverse Mortgage loan is going to be the right move for them at their current stage of life. As it is with all programs available to consumers, it will be right for some, but not for all. The key thing is to be as educated about the program as you possibly can in order to make the best financial decision for yourself and your future.