Seniors evaluating their retirement options may consider taking out a reverse mortgage loan to access their home equity as an extra source of funds. This can be an attractive option for seniors who wish to use the funds however they choose and to eliminate monthly mortgage payments.1,2 But a reverse mortgage may not be fit for all retirement scenarios. Below are a few situations where a reverse mortgage could present some disadvantages:
Plans to Move or Sell the Home Soon
If you’re planning to right-size into a new home or move into a retirement community in the next 5 years, the closing costs and fees from a reverse mortgage may not be worth it.3
There may be little to no equity left after the sale depending on the home value and accrued interest and fees.4 However, seniors planning to buy a home can utilize the Home Equity Conversion Mortgage (HECM) for purchase program. With a HECM for purchase, seniors can use the equity from the sale of their previous residence to fund the purchase of their next home in one transaction.
Property Taxes & Insurance
When you get a reverse mortgage, you are still required to maintain the home as well as pay property taxes, insurance, and HOA dues.1 Borrowers are protected, however, during the pre-funding financial assessment of their credit history and income with a Life Expectancy Set Aside (LESA). With a LESA any financial shortcomings the borrower may have will dictate funds to be set aside to ensure tax and insurance payments are made for the life of the loan.
If you plan to leave your home to your children or other heirs, it’s important to consider that a reverse mortgage can decrease your home equity over time, affecting your estate. If they qualify, a traditional mortgage can offer heirs a funding solution for securing ownership.
If your heirs decide not to keep the home, any profit from the sale of the home will go to them if sold for more than the outstanding loan balance. Thankfully mortgage insurance premiums ensure heirs will never have to foot the bill if you end up borrowing more than the home’s worth.5
While reverse mortgage loans may come with some disadvantages, in the right situation they can be a valuable tool for seniors looking to access their home equity without selling or making monthly payments.1,2 Are you considering a reverse mortgage? Call 800.976.6211 to speak with a licensed loan advisor to discover your options.
1Your current mortgage(s) and any other existing liens against the property must be paid off at or before closing. You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance, and maintain the home according to FHA requirements. Failure to meet these requirements can trigger a loan default that may result in foreclosure.
2The funds available to you may be restricted for the first 12 months after loan closing. In addition, you may be required to set aside additional funds from the loan proceeds to pay for taxes and insurance.
3Mandatory obligations are those fees and charges, as defined by the U.S. Department of Housing and Urban Development (HUD), incurred with the origination of the HECM loan that are paid at closing or during the first 12-month disbursement period. This includes but is not limited to: existing liens on the property; the loan origination fee; counseling fee; upfront MIP; third-party closing costs; customary fees and charges for warranties, inspections, surveys, engineer certifications; repair set-asides; set-aside for property taxes and insurance; and delinquent federal debt.
4 Your HECM loan will accrue interest that together with principal will have to be repaid when the loan becomes due.
5As required by the Federal Housing Administration (FHA), you will be charged an initial mortgage insurance premium (MIP) at closing and, over the life of the loan, you will be charged an annual MIP based on the loan balance.