Reverse Mortgage Disadvantages: 5 Things to Look Out For

Reverse Mortgage Arrow Sign On TreeIf you’ve ever seen Henry Winkler or Robert Wagner on TV, trying to sell you on reverse mortgages, you probably don’t remember them telling you about the disadvantages of this type of home loan. That’s because they didn’t, but we will. Reverse mortgages are just like their name implies: instead of you paying your house off to the bank, they pay you, hoping to recoup their money at a later date. If you’re new to the world of finance and loans, this course on understanding loans will show you the ropes and, if you’re in the market for a loan, help you make an educated decision.

Today we will discuss the disadvantages of taking on one of these mortgages, as well as what they are and who qualifies for them. In addition, we will show you several ways to protect yourself in this type of transaction, as well as other alternatives to the reverse mortgage loan.

What is a Reverse Mortgage?

A reverse mortgage is a loan taken out by a homeowner, age 62 and above, that supplies cash payments based on their home’s equity, as long as the home is their primary residence. Whereas with a conventional mortgage, the homeowner pays off their home in monthly payments to a lender, be it a bank or other financial institution, in a reverse mortgage, the homeowner receives payments used for home improvements, to pay off the current mortgage, to supplement income, or pay for expenses associated with healthcare. If you’re interested in the other side, and becoming the bank and earning money by loaning out money, this course on private mortgage lending will show you about real estate passive income.

Funds received from a reverse mortgage do not need to be paid back until either the homeowner moves out of the house, or they pass away. Though the maximum amount allowed in this type of mortgage differs by county in the United States, it may not exceed $625,500.00, and may come as a line of credit, one lump sum, or monthly payments, depending on the needs of the homeowner. The amount that may be loaned depends upon several factors, including the age of the person needing the loan, the current interest rate, the appraisal value of the home, and what type of payments the homeowner wants.

Disadvantages

While The Fonz may be telling you how great these loans are, it’s best that you remember that he is, in fact, a handsomely compensated spokesperson. Being that we here at Udemy receive no kickbacks from the reverse mortgage industry, we are more than happy to let you in on some of the pitfalls of these loans.

  • They Can Be Confusing 

Because of all the factors that are at play in trying to get a reverse mortgage, the process may prove daunting and difficult to follow, especially if the homeowner is unfamiliar with the intricacies of finance, in addition to being a little bit older. Getting a reverse mortgage requires more than just calling a phone number on TV, then magically receiving monthly loans for house repairs. Certain factors that need to be determined for this mortgage to be effective include: how much the homeowner may borrow (based on home location, home’s worth, age of youngest borrower), how much they owe, how they will receive the payments, what happens when they pass away, etc.

  • They Can Be Expensive 

Reverse mortgages are rife with fees, including origination and closing costs, as well as servicing fees that are incurred throughout the life of the mortgage. As a result, this option is not optimal for those homeowners that expect to leave their home in five years or less. That includes not only the intention to move homes, but if the homeowner has a medical issue that may require moving to a medical facility – if they must live in said facility for 12 consecutive months, the loan then becomes due. On the other side of the coin, if the homeowner does end up living in the reverse mortgaged home for a long time, keeping the loan out the entire time, the interest continues to compound, becoming more and more expensive as time goes on. Another thing to consider is the insurance premium. If the mortgage was insured by the Federal Housing Association (FHA), there are interest charges associated with that.

  • Inheritances Are Affected

If the homeowner plans to leave their reverse mortgaged home to a relative after they pass away, they may end up passing along some debt in addition to the house. If the loan were worth more than the value of the property, the relative would have to pay that off in the event of a death, perhaps even needing to sell the home. What was once a generous gesture to your loved ones now becomes a bill to pay.

  • Variable Interest Rates 

The interest rates associated with this type of loan are variable, and fluctuate with the movements of the market. This may prove beneficial for the homeowner, but in times of lower performance, it will affect the homeowner negatively. This course on the principles of interest will help if you’re not quite confident in this area.

  • Class Attendance 

Before qualifying for a reverse mortgage loan, the homeowner must attend, in person, a pre-approved consumer education course put on by a nonprofit or public agency.

How to Protect Yourself

If, despite what we’ve told you of the disadvantages of reverse mortgages, you still think they are a good option for you, there are a few things to know so you won’t get taken advantage of, or if you do get swindled, how to react.

  • Shop Around: This should be assumed, but don’t take the first good deal that comes your way.
  • Watch Out for Sales Pitches: Don’t be lured in by TV ads. Do your research and dig deeper than what’s on the surface.
  • You Can Cancel: Most reverse mortgages give the homeowner three business days after the loan’s closing to cancel for any reason, free of penalty.
  • Report Fraud: If you feel like you’re being taken advantage of, or a law is being violated, first let the lender, or someone who works for them, know, then file a complaint with the Federal Trade Commission (FTC), or the state Attorney General’s office. This course on detecting mortgage fraud will show you how to prevent this from happening.

Other Options

Since reverse mortgages aren’t the only game in town, and because we’ve poked a couple of holes in them today, there are other routes to take if you need a loan. This course on equity research will show you how to analyze other options.

  1. Home Equity Loan
  2. Home Equity Line of Credit
  3. Government Loans

Today we’ve discussed some of the possible pitfalls of taking on a reverse mortgage. It’s not all bad, however, and this type of loan is just what the doctor ordered for some people out there. If you’re still unclear about some of the details of not only this type of loan, but also residential mortgages in general, this course on the U.S. residential mortgage business will give you an overview of this potentially confusing industry. Good luck finding the right loan, and remember to shop around.