Reverse Mortgage - Pros & Cons
A reverse mortgage is a tool - a financial tool that works great in the right situation. You wouldn’t use a high heeled shoe to hammer a nail would you?.... or Scotch tape to connect two electrical wires? You need the right tool (mortgage) that matches your plans for the future, your income, finances, and living situation. A reverse mortgage is one such tool that has it’s pros and cons. Let’s take a look.
- No Monthly Mortgage Payments are required on a reverse mortgage - ever. (But you can make paymenst if you choose to!)
- You cannot outlive a reverse mortgage. Even if the loan balance is more than the home value or you have taken all the mones out of your line of credit - Neither is cause for the lender to begin foreclosure.
- No Minimum Credit Score requirements.
- No Income Requirements.
- All borrowers must take Independent Counseling prior to obtaining the loan to be sure that they understand the loan and are aware of possible alternatives to a reverse mortgage.
- Borrowers retain ownership of their home - The lender only has a lien on the property like any other loan.*
- There is never a Prepayment penalty. Loan can be paid off at any time or even refinanced without penalty. You can even refinance a reverse with a new reverse.
- Line of Credit cannot be rescinded by the lender, regardless of equity or home values.
- Line of Credit grows over time. This can be great for emergencies..
- You can choose to receive the funds in equal installments, in advances through a line of credit or otherwise, in lump sums, or through a combination of these options
- Non Recourse Loan - Any shortages at time of payoff due to value being less than amount owed are not a liability to the borrower or the estate.
- Flexible Options - Closed End Fixed Rate Reverse Mortgages available, Open Ended Adjustable Reverse Mortgages available. Both Standard and the new lower cost SAVER available.
- Interest Rates are close to traditional mortgage due to the fact these loans are insured byy FHA.
- Most Living Trusts are acceptable and title may remain in the name of the trust.
- You children won’t inherit a free and clear home.* The loan will be due upon the death of the last borrower. Heirs have 6 months to 1 year to payoff the loan before lender will foreclose.
- If you should need to move to other housing, you may not have as much profit from the sale of your home due to the loan balance growing over time.
- Upfront FHA Mortgage Insurance Premium (MIP) on the Standard Reverse is 2% of the home value up to a maximum of $12,510.00 on the SAVER it is .01% of the Home Value.
- Loan Origination Fee - A Negotiable Fee regulated to a maximum of $6000
- Ongoing Annual FHA MIP is 1.25% of the outstanding principal balance-added to loan mount. (Effectively raises the interest on the loan by 1.25%)
- It is an age restricted loan - only homeowners over the age of 62 can obtain a reverse mortgage.
- Lower loan to values than traditional financing - you won’t find an 80% or 90% loan.
- Loan balance grows over time depleting your equity in the home.
- Loan can become due and payable if taxes, insurance or Property Owners Association dues become delinquent*
- Loan becomes due and payable when all the borrowers stop living in the home as their principal residence
- Reverse mortgage is not available for second home or rental property.
- Loan becomes due and payable if home is not maintained.
- Loan becomes due and payable if HOA Dues are delinquent and in default.
- Line of Credit can be frozen if borrower files for Bankruptcy.
- Estate Planning issues - If the property goes into probate, the heirs may not have the legal authority to sell the home in order to payoff the loan.
Great independent links:
Department of Housing - HECM Loans
National Council On Aging - Home Equity Advisor
If you would like to discuss any particular scenario and the suitability of a reverse mortgage for you, a loved one or a client, please feel free to reach out to me. I love brainstorming!
* These things are also true of traditional mortgages.
By Deborah Nance
Your Local Southern California Reverse Mortgage Professional
Click the Learn More Button below to email me a question.
iReverse Home Loans, LLC, NMLS#810502 originates reverse mortgages in Alabama, Alaska, Arizona (MB-0919584), California, Colorado, Connecticut, Florida, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Oregon (ML-5378), Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont (1164-MB), Virginia, Washington and Wisconsin.
Important Information: Reverse Mortgages are neither "endorsed" nor "approved" by the Federal Government. The FHA (Federal Housing Administration) provides certain insurance benefits for lenders and borrowers in connection with the lender’s HECM loans; the FHA does not make or originate loans. The owner(s) retain title to the property that is the subject of the reverse mortgage until the person sells or transfers the property and is therefore responsible for paying property taxes, insurance, maintenance and related taxes. Failing to pay these amounts or failure to maintain the condition of your property may cause the reverse mortgage loan to become due immediately. A reverse mortgage is a complex loan secured by your home. Whether such mortgage makes sense for you depends on your financial situation and needs. For these reasons, we strongly recommend that you consult with a qualified independent housing counselor, family members and other trusted advisers before making this decision. This website is not from HUD or FHA and was not approved by HUD or any government agency.