For seniors aged 62 and older, a reverse mortgage is often an attractive option. In many cases, a reverse mortgage is a solid path for securing ongoing income or handling high-cost home projects by tapping your home equity. However, these lending programs aren’t without risks. Here’s a look at some of the risks associated with reverse mortgages.
They Can Be Costly Up Front
When compared to traditional mortgages, home equity lines of credit (HELOCs), and similar products, reverse mortgages often cost more up front. While origination fees are capped at $6,000, that’s potentially far more than a regular mortgage.
Mortgage origination fees are usually between 0.5 and 1% of the home’s value. As a result, you’d need to finance $600,000 to reach a $6,000 fee, suggesting the rate is 1%. At 0.5%, the financed amount could be as high as $1.2 million before you reach a $6,000 fee.
With a reverse mortgage, the origination fee is often 2% for the first $200,000 of property value and an additional 1% of any value beyond $200,000. As a result, it’s possible to hit a $6,000 origination fee with a home value of $400,000 if that structure is in place.
Plus, there are other costs to shoulder. You’ll pay a fee for any required reverse mortgage counseling sessions, the amount of which can vary. Like traditional mortgages, there are appraisal fees and closing costs. Plus, you might owe an initial mortgage insurance premium (MIP), which is typically another 2% of your home’s appraised value or the maximum lending limit (which is $1,089,300 in 2023), whichever is lower.
They Make a Home Difficult to Inherit
With a reverse mortgage, heirs usually face some challenges if you pass away. At the time of your passing, the balance associated with the reverse mortgage comes due. Unless an heir can cover that cost – either in cash or by getting their own mortgage to repay the amount owed – they typically can’t keep the house.
Instead, heirs may need to sell the property to repay what’s owed to the lender. At that point, they won’t own the property. As a result, if passing the house down is a goal, a reverse mortgage makes that difficult if the heirs or estate won’t have enough to cover that cost.
They’re Often Difficult to Understand
In many cases, reverse mortgages are incredibly complex, even when compared to more traditional mortgages and other home-related lending products. Many borrowers don’t fully understand the fee structures and similar costs, as well as other obligations that are typically part of the deal.
For example, if the property falls into disrepair, many borrowers don’t realize that the situation can trigger foreclosure actions or make immediate repayment a requirement. The same can occur if the homeowner’s insurance lapses or if property taxes aren’t paid, leading to a default.
Similarly, not listing a co-borrowing or non-borrowing spouse on the reverse mortgage means they aren’t protected if you pass away. Without listing them, they could face foreclosure if you pass.
Ultimately, reverse mortgages are complex, and the rules are strict. As a result, it’s critical to review every detail and requirement before signing to ensure you understand the road ahead.
