In the last few weeks I have had many people ask me about reverse mortgages and if they are a good idea. My immediate response is “NO!!!!”, but I realize that people may be looking for a little more information than that. Let me start with explaining what a reverse mortgage is and how they work. A reverse mortgage is essentially where the lender is paying you to stay in the home instead of you paying the lender each month. You must be over 62 to qualify. You can receive the money as either a lump sum, payments over a fixed time, a line of credit or a combination of these options.
Sounds too good to be true?!?! Well it is...Here are 8 reasons to avoid a reverse mortgage.
#1: High fees. A typical 30-year mortgage costs about $3000 in closing costs. A reverse mortgage can be up to $15,000! This is due to more regulations with a reverse mortgage, so lenders charge more.
#2: Mortgage insurance. One of the most popular reverse mortgages is called a Home Equity Conversion Mortgage (HECM). In order to obtain this you have to pay a 1.25% premium on your loan each year.
#3: Loan amounts are capped. With the HECM the rule is you can only get about half of your equity, with a cap of $625,500. Say your home is worth $2 million, you can still only do $625,500 because of the cap.
#4: Interest continues to accrue. Interest is accrued on your loan balance each year, so if you’re not paying down the balance, the size of your loan will increase each year.
#5: Younger spouse penalty. To limit risk, the distribution amounts are based on the age of the younger spouse.
#6: Lack of choices. Currently there is only one jumbo reverse mortgage lender in the country.
#7: Benefits affected. While the reverse mortgage won’t impact social security, it could affect any needs-based programs like Medicaid. You would need to make sure that your monthly income doesn’t exceed Medicaid limits.
#8: Stringent repayment terms. When the last borrower dies, they heirs typically have 30 days to pay back the loan or sell the house.
If you are in financial hardship due to your home, there are many different options, contact me for more information.