Reverse Mortgage Disadvantages

When getting acquainted with this unique home equity loan, people often ask “What are the Reverse Mortgage Disadvantages?”

It is a fact, that this loan is not suited for everyone. Here are some reasons why a reverse mortgage may not be the best option for tapping into home equity…or what might be considered disadvantages, for some people.

First You Should Know How The Loan Works

This type of home loan works exactly the opposite way that a conventional or “forward” mortgage does. With this loan your debt is rising and your equity is falling. In other words you are using up or spending the equity you built up from earlier years when you paid off your “forward” loan.

During those early years your equity was rising and your debt was falling. If you get this kind of loan you will be reversing the equity back to yourself in the form of cash today. Consequently, there will be less to pass to your heirs at the end of your lifetime.

If you are a person who insists on leaving substantial home equity to your heirs or possibly even a free and clear home that they can keep in the family, then a reverse mortgage would be a disadvantage in your case.

Over time this loan will become larger due to the interest accumulation on the money you take from your home equity. In other words, you will be compounding interest over your lifetime which will be added to the loan balance that will be required to be paid back to the lender when you permanently leave your home. That’s why I referred to this loan earlier as a “rising debt.”

You see, even though you will not be required to make any payments on this loan while living in your home, it is still a debt that eventually must be repaid with interest, after you permanently move out or pass away.

If your home appreciation out-paces the rising debt balance, your heirs will be able to keep any excess equity from the sale of the home. However, in the current real estate climate, that may be a tall order.
Reverse Mortgage Disadvantages

Other Considerations

Although, you do not have to income qualify for this kind of equity loan in the traditional sense, you still must be able to maintain the property, pay the real estate taxes and stay current with your homeowner’s insurance and any association dues that you may have.

For some folks, these expenses might be more than their budget can absorb on an annual basis. If your real estate property taxes become delinquent and stay delinquent for an extended period of time, you could be at risk of losing your home to foreclosure due to unpaid taxes. Obviously a reverse mortgage disadvantage for someone who simply should not try to stay in a home that they can not afford on the most minimal level.

Recently, lenders and FHA/HUD have been considering implementing qualifying standards or what they refer to as a financial assessment that will ensure that a person applying for a reverse mortgage will have the means going forward to maintain these basic expenses.

Low Income, SSDI or Other Benefit Recipients

People receiving SSDI, Medicaid or low income, needs based assistance must proceed with caution if considering this loan. Often cited as one of the reverse mortgage disadvantages, is the fact that you could lose your benefits if there are restrictions for how much “liquid” cash you are allowed to have on a monthly average in your bank accounts.

I don’t consider this an absolute disadvantage, because with prudent
structuring of your loan and receipt of your equity in such a way that it does not jeopardize your ability to remain on the program, you can safely take out a reverse mortgage. You simply must get accurate advice from the program coordinator for the benefits you receive and stay within the guidelines for how much cash you can take at one time. Once, again getting complete and accurate information in advance is the key.

Please keep in mind, this loan does NOT negatively impact regular Social Security or Medicare benefits…only needs based entitlement programs.

Concluding Reverse Mortgage Disadvantages

Another item worth mentioning with regard to why some people may not be well suited for this loan pertains to the requirement that the home you get a reverse mortgage on must be your primary residence.

If you travel for extended periods of time and are away from your home for more than 6 months out of the year, your home would not be considered your primary residence. Another example would be, if you have to go to a nursing home or long-term rehabilitation center for more than a year, your loan will become due and payable in full.

Our list of reverse mortgage disadvantages would not be complete without mentioning the costs involved in getting this kind of loan. The costs are roughly 2% higher than traditional home loans. The FHA mortgage insurance premium (MIP) is 2% of the appraised value of the home and is factored into the upfront charges for the loan. Most other costs are comparable to a traditional loan.

But, because the costs are higher than other loans, you should be committed to staying long term in your home. If you’re thinking of selling or relocating in less than 5 years, it would be best for you to consider alternative solutions to access your home equity in the short term.

Knowledge is Power

Accessing your home equity through a HECM (Home Equity Conversion
Mortgage) is a big decision and should only be made after you have all the information necessary to determine its appropriateness for your specific financial planning needs. Being aware of the reverse mortgage disadvantages is just as valuable as learning about the benefits. I hope this article shed light on the topic and has armed you with the necessary knowledge to make a wise choice for yourself and your family.

Useful Links to Learn More:

AARP Report – “A Rising Debt Loan”

What Will be Left for My Heirs?

Reverse Mortgages Cost Too Much