Author: Maria Alfano
In our previous post, we talked about the 9 pros of a reverse mortgage. We would not do you any justice if we did not arm you with the 9 little-known cons of reverse mortgages for seniors that will make you think twice.
Like you, we needed all the facts – good and bad – before we could make an educated decision about whether or not to get a reverse mortgage.
You will learn more about how a reverse mortgage works and some of the key reverse mortgage rules and the difference between a HELOC and a reverse mortgage.
Before you make a huge commitment to a reverse mortgage it is imperative that you know all the facts. There are pros and cons to having reverse mortgages. Only you can weigh them out to see if this option is for you.
For us, it was important to have all the facts before we made that all-important decision to reverse or not to reverse!
This post will highlight how a reverse mortgage works and some of the key rules you need to know.
9 Little-Known Cons of Reverse Mortgages for Seniors That will make you Think twice
Downside of Reverse Mortgages
1 – Balance of the Loan Increases
The beauty of a reverse mortgage is also its pitfall. You don’t have to make monthly payments but if you don’t you will accumulate fees each month that are due at the end of the mortgage agreement. A fifty thousand dollar reverse mortgage can easily turn into fifty-five or sixty thousand over the life of the reverse mortgage.
Interest compounds on this loan over time. When the loan sits unpaid for months or even years, interest owed is calculated on the amount of the loan + any interest that was not previously paid by the due date. Essentially, you are being charged interest fees on the interest owed on the original reverse mortgage amount. Or, the unpaid interest gets tacked onto the mortgage amount, increasing the amount of the loan then you are charged interest based on the new value of the reverse mortgage
Example: The original amount of the reverse mortgage is $50,000 and the interest owed on this loan for 12 months is $6.500. Because you made no payments towards reducing the balance, the new loan amount becomes $56,500. The interest amount owing will be calculated on the $56,500 amount going forward.
Can You Sell Your House With A Reverse Mortgage
2 – Moving?
Moving from your home means you will be required to pay back all the funds to the mortgage company when you move. You need a strategy for getting out of the reverse mortgage. You may be forced to sell your home depending on the amount borrowed should you decide to move if you cannot afford to pay off the loan amount.
Aging brings with it many complications and varying life goals. Plan your time accordingly. Choose in advance what you would like your golden years to look like. If moving is in your future, consider making that move after the term of the reverse mortgage agreement. Florida and Arizona will always be there but the value of your home may not if you get tied up into a reverse mortgage without identifying where you want to live when you grow old. You may need to wait longer than you want to move on with your life if you are tied to a reverse mortgage for seniors. Not to mention, there could end up being no legacy left for your loved ones.
3 – Five Years
There is a 5-year commitment tying you and your partner to this home and mortgage for at least five years. This means one of you must continue to live in the home for the full five-year period. This might put a wrinkle in your plan to move to Florida or somewhere else that is warm. Prepare to pay the loan off in full if you plan to move out sooner than 5 years.
Let’s face it, 5 years is a long time at any age but as an older citizen, a 5-year commitment may be too long of one. We don’t know how much time we have left. Having money in hand when you can use it, could be detrimental to those you leave behind. Heirs will be required to pay the amount in full or sell the property to pay off your debt.
4 – Early Repayment
If you happen to win the lottery and you no longer need the reverse mortgage, paying it back before the first five years means you will incur penalties. Think about it, these companies are relying on you to pay fees for a minimum of 60 months. By paying back early, they lose out on those fees so as a thank you for returning their money to you early, they charge you a penalty. Personally, I would bank the lotto money and pay them back on the day it’s due.
Additional Costs With Reverse Mortgages
5 – Insurance & Property taxes
One of the main stipulations of a reverse mortgage for seniors is that you maintain the upkeep of the property. This includes insurance and property taxes. Please read the fine print. The lender has the right to foreclose on your property should you miss payments or let the home go in disrepair. You are applying for a reverse mortgage for a reason. Home repairs are not necessarily why. Adherence to the conditions of the loan is difficult if you aren’t prepared for how you will spend the newfound wealth.
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6 – Your age
In the U.S. at least one spouse or partner must be 62 years old to apply for a reverse mortgage. In Canada, some lenders allow anyone over the age of 55. This is critical to note. If the spouse who has reached the qualifying age passes and the remaining spouse is not old enough, you may be required to pay the reverse mortgage back at the time of their passing. This could result in you having to sell your home.
The last thing your partner wants is for you to lose your home because you are too young to qualify for the reverse mortgage. Many seniors have chosen to wait until their spouse is within a year or two of the qualifying age before committing to this loan. Something you might want to think about…
7 – Your asset
The more equity you take out of the home through a reverse mortgage for seniors, the less is left for your heirs. We are all proud of what we have accomplished in life and part of that is leaving a legacy for our loved ones. If we use up most of our home value through a reverse mortgage, there is little to no legacy to leave.
Remember this loan needs to be repaid. If you use the full value of the home to obtain a loan, then you no longer own it. The mortgage company does. They will foreclose on the loan if your family cannot afford to keep up with the monthly payments.
Are Reverse Mortgages a Ripoff
8 – Your Heirs
Leaving the property to your heirs can be both a blessing and a curse. If the outstanding reverse mortgage cannot be paid off at the time of passing, the heirs will be forced to sell the home and all its memories. The lender will expect their money back within the prescribed timeline as noted in the mortgage agreement one way or another.
Talk to them prior to making a decision. Advise them of the good points of the cons of reverse mortgages. Get their feedback. Make an informed decision that everyone can live with, in the event that something should happen to you.
Why You Should Never Get a Reverse Mortgage
9 – Medicaid & SSI
Medicaid and SSI are negatively impacted by a reverse mortgage in some cases. This will vary from state to state. Talk to your insurance broker or call Medicaid and SSI to determine what risk, if any, you could be exposing yourself to. Inform yourself before taking the leap into a reverse mortgage. Find some helpful links below for Medicare and SSI.
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HELOC vs Reverse mortgage
A HELOC or home equity line of credit is similar to a mortgage – conventional or reverse. The key differences are:
- A HELOC has revolving credit. A reverse mortgage is a one-time payment.
- A HELOC will require payments each month. As you make payments the amount owing decreases but the amount available to you increases. Thus it has revolving credit. A reverse mortgage does not require monthly payments
- A HELOC usually has a lower interest rate than a reverse mortgage. This depends on the lender.
- A HELOC can be repaid at any time without penalty. A reverse mortgage ties you to the loan for a minimum of five years.
In this post, I shared with you the cons of reverse mortgages for seniors, how they work, and the differences between a reverse mortgage vs a HELOC.
Thinking of renting out your home instead? You will enjoy this book – The Curse of Unit 4. Find it on Amazon. Written by a very dear friend who chronicles her learnings as a new landlord. Quinn describes the lessons she learned as a landlord and the many ways she was able to get good quality tenants who consistently pay the rent. This is a viable option and relieves any fears you may have with respect to the cons of reverse mortgages. Receive a steady monthly payment that will not impact your Medicare. Leave a great legacy behind to your family – one that is not eaten up by a large loan.
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