Reverse Mortgages – Any Catches?

From a conceptual viewpoint, reverse mortgages appear to be a viable option for home equity rich persons over 62 years of age.  I mention age, because only persons over 62 qualify for this type of mortgage.  Reverse mortgages are the inverse of traditional mortgages.  The borrower borrows against their home equity.  Instead of making payments to the bank, the bank pays the borrower.  So, for a senior in search of cash flow – it could be better than picking up a part-time job.

So, what are the drawbacks to reverse mortgages?  First of all unlike a traditional mortgage, your debt grows instead of your equity.  Thus, your heirs won’t inherit a free and clear house.  If that is a concern a life insurance policy can be taken out equivalent to the size of the mortgage.  The life insurance policy could be then used to pay-off the loan making the house unencumbered for your heirs.  Another drawback to reverse mortgages is that they aren’t cheap.  There are fairly substantial closing and service fees.  Additionally, the loan accrues interest.  There are mortgage calculators available to help with the analysis.

I am curious of others thoughts on reverse mortgages.  Send me an email or leave a comment, but all in all it seems like it is better than asking “paper or plastic” in your retirement years.  

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  • Gordon Proud

    Do some research ONLY on the federal govenment websites regarding reverse mortgages. They are the only guarantor on these type loans. A government trained counselor is requeired on every transaction prior to originating the loan. Coming from a sales manager of a national mortgage company, fees are always negotiable and are never to be “excessive” in your mind. if you think it’s too much, as for a reduction or take your business elsewhere. Guess what, the fees will probably lower immediately. My company does not offer reverse mortgages, but I wish we did for more loan origination opportunities. make sure you look at the RESPA documents (Good Faith Estimate & Truth in Lending) in detail to see how much you will be paying “back” over the term you select. You are better off not using all your equity unless you require all of it to live. Leave some for emergencies or for the estate. Email me if you have questions.

  • Catherine Brooke

    I think it is important to research a reverse mortgage on more than just the federal government websites. For example, AARP has an extensive amount of information regarding reverse mortgages on their website, and does not recommend one lender or loan over another. There are different types of reverse mortgages, both the FHA insured HECM, the Fannie Mae Homekeeper, and the Financial Freedom proprietary Cash Account Advantage. Each of the loans could be right for different people. And a reverse mortgage will never allow you to use “all” of your equity, as there needs to be equity available to secure the rising loan balance. The HECM, Homekeeper and Cash Account loans are “Non-Recourse” loans, meaning you can never owe more than your home is worth. Overall, I think they are not for everyone, but they can also be a lifesaver.

  • The term “reverse” should never be used in or around the word “mortgage” or “payment plan.” It’s a disaster just waiting to happen.