When it comes to retirement planning, a reverse mortgage can be a viable option for some seniors. This type of loan allows homeowners aged 62 or older to borrow against their home equity, and the money can be used in any way they choose. However, there are some potential drawbacks to consider before applying for a reverse mortgage. In this article, we will take a closer look at what those downsides are.
What Is the Downside to a Reverse Mortgage Table of Contents
What Is the Downside to a Reverse Mortgage Table of Contents
What Are the 3 Types of Reverse Mortgages?
What Are The Downsides to a Reverse Mortgage?
What Additional Fees Come With a Reverse Mortgage?
What is The Average Interest Rates on a Reverse Mortgage?
What is The Upfront Mortgage Insurance Premium On a Reverse Mortgage?
How Much Money Do You Get From a Reverse Mortgage?
What Are the Requirements for a Reverse Mortgage?
What Is the Downside to a Reverse Mortgage Table of Contents
What Are the 3 Types of Reverse Mortgages?
What Are The Downsides to a Reverse Mortgage?
What Additional Fees Come With a Reverse Mortgage?
What is The Average Interest Rates on a Reverse Mortgage?
What is The Upfront Mortgage Insurance Premium On a Reverse Mortgage?
How Much Money Do You Get From a Reverse Mortgage?
What Are the Requirements for a Reverse Mortgage?
What Happens at the End of a Reverse Mortgage?
Who Owns the House in a Reverse Mortgage?
What is a Reverse Mortgage?
A reverse mortgage is a loan available to homeowners 62 or older that uses the home's equity as collateral. The loan generally does not have to be repaid until the borrower moves, dies, or sells the home.
What Are the 3 Types of Reverse Mortgages?
There are three types of reverse mortgages: single-purpose, proprietary, and home equity conversion mortgages (HECMs).
Single-purpose Reverse Mortgages
Single-purpose reverse mortgages are the least expensive option. They're offered by some state and local government agencies, as well as non-profit organizations, but they're not available everywhere. These loans are typically used for specific purposes such as repairing your home or paying property taxes.
Proprietary Reverse Mortgages
Proprietary reverse mortgages are private loans that are backed by the companies that offer them. Because they're not insured by the federal government, they may be more expensive and have higher fees than HECMs.
Home Equity Conversion Mortgages (HECMs)
Home equity conversion mortgages (HECMs) are federally insured reverse mortgages and are the most popular type. HECMs are available through HUD-approved lenders. If you have a HECM, you can choose to receive your loan as a lump sum, fixed monthly payments, or a line of credit.
Before you decide on a reverse mortgage, it's important to understand the fees and risks involved. With any type of reverse mortgage, you're borrowing against the equity in your home.
That means your loan balance will increase over time as interest accrues. If you eventually need to sell or refinance your home, you may owe more than what the property is worth at that time.
If you take out a reverse mortgage and don't pay your property taxes or homeowners insurance, your loan balance could grow even larger and put your home at risk.
What Are The Downsides to a Reverse Mortgage?
Reverse mortgages are not for everyone. There are several potential downsides to taking out a reverse mortgage.
First, you may have to pay some fees and closing costs. These can add up, and may be higher than what you would pay for a traditional mortgage.
Second, a reverse mortgage will decrease the value of your estate. This is because the loan balance will increase over time as interest accrues, and it will need to be paid back when the house is sold.
Third, if you take out a reverse mortgage too early in life, you may not have access to all of the equity in your home later on down the road when you really need it.
Fourth, if you move or sell your home before the loan is paid off, you may have to repay the entire loan balance.
Finally, if you die before the loan is repaid, your heirs may have to sell the home to pay off the debt.
What Additional Fees Come With a Reverse Mortgage?
In addition to the fees mentioned above, there are a few other fees associated with taking out a reverse mortgage. These include:
- An appraisal fee: In order to qualify for a reverse mortgage, your home must be appraised by a professional. The cost of this appraisal will be added to your loan balance.
- A loan origination fee: This is a fee charged by the lender for processing your loan application. It is typically around $500, but can vary depending on the lender and the type of loan you are taking out.
- A monthly servicing fee: This is a small fee that is charged each month to cover the costs of servicing your loan (e.g., sending statements, collecting payments, etc.).
What is The Average Interest Rates on a Reverse Mortgage?
The average interest rate on a reverse mortgage is between 4% and 5%, depending on whether you take out a fixed rate mortgage or an adjustable rate mortgage.
The average interest rate on a reverse mortgage is higher than the rate for a conventional home loan. The origination fee and other closing costs are also typically higher. Because of these higher costs, it can take longer to recoup the equity in your home through a reverse mortgage than with other types of loans.
Another downside to consider is that you may not have access to all of the equity in your home right away. With a traditional mortgage, you borrow a set amount and make monthly payments until the loan is paid off. With a reverse mortgage, you can access up to 60% of your home's equity immediately, but that leaves less for your heirs when you die.
Lastly, if you move out of your home before the loan is paid off, you will have to repay the loan in full. If you can't afford to do that, your home may be foreclosed upon.
What is The Upfront Mortgage Insurance Premium On a Reverse Mortgage?
The upfront mortgage insurance premium (MIP) on a reverse mortgage is high, and the ongoing MIP is also expensive. The upfront MIP is what you pay to insure the loan when you first get it. The ongoing MIP is what you pay every month to keep the insurance in place. Both are required if you have a reverse mortgage.
The high cost of the insurance can make a reverse mortgage less attractive than other options, such as a home equity line of credit (HELOC). With a HELOC, you generally don't have to pay any insurance premiums. However, with a HELOC, you're also responsible for making monthly payments on the loan balance. If you don't make those payments, your lender can foreclose on your home.
With a reverse mortgage, you don't have to make monthly payments on the loan balance. The loan is not due until the borrower dies, sells the home, or moves out of the home for 12 months in a row. However, because of the high insurance premiums, a reverse mortgage can end up being more expensive than a HELOC over time.
How Much Money Do You Get From a Reverse Mortgage?
The answer to this question depends on several factors, including the value of your home, your age, and the type of reverse mortgage you choose. Generally speaking, the older you are and the more valuable your home is, the more money you can borrow.
However, it's important to remember that a reverse mortgage is a loan - and like any other loan, you will have to pay interest on the money you borrow. The amount of interest you'll owe will depend on the terms of your loan agreement. over time, the interest on your loan can add up and eat into any equity you've built up in your home. That's why it's important to consider all aspects of a reverse mortgage before making a decision.
What Are the Requirements for a Reverse Mortgage?
In order to qualify for a reverse mortgage, you must:
- Be at least 62 years old
- Own your home outright, or have a low mortgage balance that can be paid off at closing with proceeds from the reverse loan
- Live in the home as your primary residence
- Not have any delinquent federal debts
- Participate in a consumer information session given by a HUD-approved HECM counselor.
Though there are several requirements to qualify for a reverse mortgage, it doesn’t necessarily mean that obtaining one is difficult. In fact, many seniors find that they easily meet these requirements and are approved for the loan.
What Happens at the End of a Reverse Mortgage?
Lenders typically structure reverse mortgages as home equity lines of credit (HELOCs), meaning that the borrower can take out as much money as they need, when they need it, up to a maximum loan amount. This is different from a traditional mortgage, where the borrower takes out a lump sum at closing and makes monthly payments toward principal and interest.
At the end of a reverse mortgage, the borrower must repay the full loan amount plus interest and fees. If the value of the home has decreased, or if the borrower has not been able to keep up with property taxes and insurance payments, they may owe more than what the home is worth. In this case, they would be responsible for paying back only what the home is worth. If the home is sold, any remaining equity belongs to the borrower or their heirs.
Who Owns the House in a Reverse Mortgage?
In a traditional mortgage, the homeowner owns the house outright. In a reverse mortgage, the bank owns the house and the homeowner lives there rent-free until they die or move out permanently.
The major downside to this arrangement is that if the value of your home decreases, you could end up owing money to the bank.
Another downside is that you may not be able to pass your home on to your heirs when you die. If you want to leave your home to your children, you'll need to make sure they can pay off the loan in full when they inherit it.
Lastly, if you fail to keep up with property taxes or homeowners insurance, the bank could foreclose on your home.
