Reverse Mortgage Pros and Cons

A reverse mortgage is a really big financial decision.  If you’ve been thinking about this option, it’s important to know both the benefits and the risks involved.  That’s really the main reason I started writing these blog posts.  

If we haven’t met before, I’d like to introduce myself.  I’m happily retired and living in a beach town.  I started to investigate reverse mortgages for myself, and I found out that there was a lot to learn.  So I started this blog to share what I learned in the hopes that anyone else in the same situation might benefit.  

I know that for me, like many seniors, I became interested in a reverse mortgage as a way to supplement my cash flow now that I’ve retired.  But there are plenty of reasons why people could benefit from a reverse mortgage - whether that’s to help pay some large medical bills or complete some home renovations.  However, it’s also important to understand the implications of a reverse mortgage - things like the closing costs and the rules that a borrower must follow once the loan is complete.  I’d like to do that today. 

Let’s start with a simple list of Pros and Cons:

Pros:

• The bank pays the you
• You will be able to stay in your current house
• You will never owe more than the value of your house

Cons:

• Closing costs
• Home maintenance required
• Inheritance passed to heirs can be reduced

For the Pros, the first, and likely most appealing part of a reverse mortgage is that the bank pays you.  A reverse mortgage is a loan that leverages the equity in your house.  If you have a traditional forward mortgage, then you know that you have to pay the bank.  A reverse mortgage can really have a huge swing on finances because if you go from a traditional forward mortgage to a reverse mortgage, you will change from making payments to receiving payments.  It’s important to know that in this situation, the traditional forward mortgage must be paid off first, because a reverse mortgage must be your primary mortgage.  Once the reverse mortgage is closed, you can choose from a few options on how the bank pays you, such as: a lump sum, fixed payments over time, a line of credit, or a combination of those.  

Next, a reverse mortgage requires your house to be your primary residence.  For many seniors, moving can be a stressful experience.  Perhaps they’ve been in a house for decades and built up a network of friends, doctors, barbers, restaurants that they’ve grown to love and trust.  Many don’t want to give this up to sell their house and downsize.  A reverse mortgage is only a good idea if you plan to stay in your current house and don’t have any short term plans to move (selling a house with a reverse mortgage is one way it becomes due and payable).

Finally, a reverse mortgage is a non-recourse loan.  This means that you will never owe more than the value of your home when it’s sold.  A common concern is “what happens if the value of my home decreases”, and this is certainly a viable thought.  However, since most reverse mortgages are governed by the Federal Housing Administration (FHA), there are special rules in place to protect borrowers from having to repay a loan value that’s higher than the proceeds from the sale of that home.

Probably the biggest item in the “Cons” section for those thinking about a reverse mortgage are the closing costs.  Just like a traditional forward mortgage, a reverse mortgage has closing costs.  Because a reverse mortgage is a non-recourse loan, there is a 2% insurance payment that’s part of the closing costs.  For a home that’s worth $500,000, this would mean $10,000.  Additionally there are origination fees for things like underwriting and processing that can range from $2,000 to $6,000 as well as third party fees for things like attorney’s fees and appraisals that can range from $2,000 to $4,000.  

It’s important to know that the origination fees and third party fees can often be negotiable.  If you are considering a reverse mortgage, it’s a good idea to shop around.  Additionally, these fees can be part of the loan amount, so you are not necessarily required to have the cash to pay the closing costs.  

A reverse mortgage also means that the homeowner will have to keep the home in good standing.  Since a reverse mortgage most commonly becomes due and payable when the borrowers pass away, it’s important that the home has not fallen into disrepair.  This would obviously make it harder to sell (and the bank to recover the cost of the loan).  Additionally, home owners need to stay up to date on property taxes and homeowners insurance.  

Finally, there is a way where your heirs would inherit less money due to a reverse mortgage.  Since we mentioned that a reverse mortgage most commonly becomes due and payable when the borrowers pass away, there are a few options for what happens.  Your heirs could sell the house and use the proceeds to repay the loan balance (and keep anything over and above this if applicable), keep the house and use other funds to repay the loan balance, or do nothing and let the bank sell the house to satisfy the outstanding loan balance.

In closing, a reverse mortgage can be a very useful financial tool during retirement.  However, there’s a lot of information that’s involved to determine if it’s right for you.  The best thing you can do is read as much as you can (on this blog for instance) and ask as many questions as you can.  One place I’d recommend for more information is Equity Access Group.  This is a lender that specializes in reverse mortgages.  Give them a call today if you think a reverse mortgage might be right for you.