Reverse Mortgage Pros and Cons
This page, Reverse Mortgage Pros and Cons, will explain the benefits as well as the disadvantages of reverse mortgages.
Sometimes people will say "If something sounds too good to be true, it usually is." I could not agree more. That is why Reverse-Mortgage-Colorado.net includes this page so you can learn about both the pros and the cons of reverse mortgages.
Whenever I think about pros and cons, good and bad, advantages and disadvantages, I always remember the old movie, "Oh God! Book II". George Burns plays the role of a lovingly simple God who is trying to get the Word out through a young girl. There's a scene in the movie where she asks Him why bad things happen.
God explains it to her by saying that there has to be an opposite. If everyone always experienced only the good in life, how would anyone know that it was good without having something bad to compare it to. Please be advised that this is a terrible oversimplification of this scene, but you get the point (I hope).
Reverse mortgages have their pros and their cons, just like conventional mortgages and even homeownership. Even people have their pros and cons, good and bad. Just ask my wife - but she loves me anyway.
What I've done here is to attempt to break down the reverse mortgage pros and cons into easy to read categories. However, please keep in mind that not everyone has the same definition of advantages and disadvantages. One person may have the goal to die broke while another thinks it's terrible not to leave a legacy for their family. I've worked with both on many occasions.
To each his own. To do a reverse mortgage is ultimately your decision. My job is to make sure that you have accurate information so you can make as educated of a decision as possible.
Reverse Mortgage Cons (Disadvantages)
#1 - A reverse mortgage will chew up all of your equity and you will have nothing left for your heirs. In addition to that, you may need it in the future to pay for health care costs.
This is one of the most common objections that people have against doing a reverse mortgage. If keeping as much equity in your home as possible is very important to you, then I recommend that you do NOT take out a reverse mortgage.
One of the things I tell every single person that is considering a reverse mortgage is the following:
Every month you will receive a statement that will show the amount of interest and mortgage insurance that has been charged to your account. Your balance will get larger each month, not smaller. So if looking at this statement and seeing the balance grow is going to cause you more stress than having the reverse mortgage relieves, then don't do the reverse mortgage! This loan is meant to RELIEVE financial stress, not create more.
I have closed well over 650 reverse mortgages since 2003 and have never, ever had a customer, or an heir, tell me that they regret taking out their reverse mortgage. The reason is that I am very clear with people about this point.
If someone is not OK with the thought that they might use up all of their equity, then I don't take an application from them to begin with. I will never talk someone into taking a reverse mortgage if they don't feel 100% OK with this.
Having said all that, I don't completely agree with this reverse mortgage con. Since we don't loan anywhere near 100% of the value of the home, odds are that there will probably some equity left.
**** Note ****
If it is Greek to you as to why your reverse mortgage balance increases, please visit the Reverse Mortgage Facts page.
**** Thanks ****
Also, for people who are using some of the reverse mortgage funds to pay off an existing mortgage, it would be wise to take some of the monthly savings, if possible, and purchase long term care insurance or lifeinsurance to help defray some of the costs if you do need long term care or to leave a legacy when you die.
Either way, some people look at it as a disadvantage of a reverse mortgage, so I wanted to address it.
#2 - Reverse mortgages are too expensive
This objection used to be a much larger reverse mortgage con than it is now, thanks to recent changes by HUD, the expense of a reverse mortgage can depend on how much money is taken by the homeowner at the closing.
HUD now limits the amount that you can withdraw from your reverse mortgage during the first 12 months of the loan to 60% of the “Principal Limit”, (This is the total amount that HUD allows the lender to loan – See glossary page). However, if you have an existing loan against your home, you can take up to 100% of the money available to pay it off.
If you do need to take more than 60% of the principal limit the “Initial Mortgage Insurance Premium” (IMIP) is much higher than if you take 60% or less.
For example, if you have a $180,000 home and $100,000 available to you (Principal Limit) and you have an existing mortgage to pay off of $40,000, your IMIP will be 0.5% of the value of your home ($900). Plus you will have an additional $20,000 that you can take within the first 12 months of the loan. The remaining amount ($40,000) will be available to you in a line of credit 12 months after the date of the closing.
However, given the same scenario except that you have a $70,000 mortgage on your home, instead of being charged a 0.5% IMIP, you would be charged a 2.5% IMIP because you are having to take out more than 60% of the principal limit. Your fee would be would be $4,500 instead of just $900 ($180,000 value x 2.5% = $4,500).
You can see that the costs for a reverse mortgage can vary dramatically depending upon the situation. In addition, different lenders can charge different origination fees as well, so that is another variable. Your best bet is to call me directly and by simply answering a few questions, I can give you a quote on what the costs would be to get the reverse mortgage.
#3 - Money from a reverse mortgage is not free
All banks and lenders are in business to make money and reverse mortgage lenders are no different. But sometimes someone will ask why they have to pay interest to borrow their own money. Here is what I tell them:
A reverse mortgage is a loan against the equity in your home. Anyone who loans money will charge interest. This works no different than any other loan against your home. Whether it's a normal 30 year fixed rate loan or a HELOC, the company loaning you the money will charge interest on the loan.
In the case of the reverse mortgage, the lender defers the interest until the last homeowner permanently leaves the home. When you no longer live there as your primary residence, the loan balance plus all accrued interest and MIP charges are due at that time.
#4 - Dealing with reverse mortgage sales people - Yuck!
This is probably the biggest disadvantage of a reverse mortgage! Some sales people will say or do anything to get the sale.
Unfortunately, some people look at reverse mortgages as the next big wave to jump on and take advantage of. You can typically tell who these people are by the feeling you get in the pit of your stomach when they start talking. Something just isn't right.
Follow that gut feeling, and kick them out as soon as possible. You do not have to go with the first person you talk with. Shop around. But look
at more than just the lowest fees.
Sometimes, the best, most qualified person is the one that doesn't have to drastically discount his rate, fees or costs because he treats people the right way and has plenty of business. He wants to work with you, but he's not willing to work for next to nothing, just to "get the deal".
When making any major decision, use common sense and follow your gut. Also, check people out. Find out how long they have been specializing in reverse mortgages. See if they are affiliated with the National Reverse Mortgage Lenders Association NRMLA
Now that we've got the negative stuff out of the way, let's talk about the good side of the reverse mortgage pros and cons coin.
Reverse Mortgage Pros (Advantages)
#1 - Getting a loan that you never have to repay as long as you live in your home
This is by far the biggest advantage of having a reverse mortgage. About 62% of the loans I closed last year were to people who had an existing loan on their home. One of the major reasons for getting a reverse mortgage for these people was to payoff that mortgage and stop making mortgage payments.
**** Note ****
Please note that when you have a reverse mortgage, the home stays in your name and you, must continue to pay your property taxes and homeowner's insurance yourself.
The lender will not pay these for you.
****End of Note****
Just imagine how much longer your savings or IRA would last if you didn't have a mortgage payment to make every month. A lot of people get a reverse mortgage with the sole purpose to pay off the existing loan on their home so that they can finally retire.
#2 - Easy to qualify for a reverse mortgage
In April of 2015 HUD announced that all reverse mortgage lenders would have to conduct a “Financial Assessment” on all new reverse mortgage applicants. This means that the lender has to verify that the homeowners have the “willingness and capacity to timely meet their financial obligations and comply with the mortgage requirements”.
This means that the lender has to verify that you have fairly good credit “willingness” and enough income “capacity” to pay your existing bills as well as pay the property taxes and homeowner’s insurance payments.
While we do have to jump through a couple of extra hoops with these requirements, it is still easier to qualify for a reverse mortgage than it is for a normal “forward” mortgage.
#3 - Improve the flexibility and security of your retirement
I know this sounds like some platitude that a politician might use, but it is true. I have a folder full of testimonials from people who have improved
their retirement years and their lives with a reverse mortgage.
If you look at my testimonials page , you will see videos and stories from people who've used a reverse mortgage for everything from a new RV, to travel, to people who've paid off their mortgage and bills so they can sleep easy at night.
If you enter into the reverse mortgage with the right mindset about your equity, it really can help you breathe easier and live a more flexible, secure and full retirement.
#4 - Safety and fairness
I've been in the credit and mortgage business since 1987 and a reverse mortgage is by far the most heavily regulated loan that I have ever closed. There are more checks and balances from both the state and federal governments than I can count. Unfortunately, the down side of this is the voluminous amounts of paperwork.
But what else would you expect from a government insured loan.
That's it. Hopefully this helps you to fairly evaluate the reverse mortgage pros and cons. I've tried to keep it as fair as possible, but remember that I am in the business of providing reverse mortgages so please know that I am of course bias towards thinking that reverse mortgages are, on the whole, a great product for the right person.
I recommend getting other people's opinions who might not be biased, but please consider the source. Make sure that they understand how reverse mortgages work.
The most common misconception is that the bank takes the house when you die. If the person whose opinion you are seeking tells you this, you'll know that they do not understand them and probably should seek out a more educated source.
Thanks so much for taking the time to read my reverse mortgage pros and cons page.
You can also learn more and stay up to date with changes in the reverse mortgage world by visiting my reverse mortgage blog page.