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  • John Aigner

Should you consider a Reverse Mortgage?

Updated: Mar 21, 2023


Reverse mortgages are loans that are designed for homeowners who are 62 years or older. The loans allow homeowners to borrow against the equity in their homes, without having to sell or move out of the property. The borrowed funds can be used for a variety of purposes, such as paying off debt, making home improvements, or covering living expenses. In exchange for the loan, the lender receives a portion of the homeowner's equity. However, there are risks associated with reverse mortgages that you should be aware of before deciding to take out this type of loan.

  1. Interest on reverse mortgages tend to be higher than those on traditional mortgages. This is because the loan is not paid back until the homeowner dies or moves out of the property, and the lender assumes more risk as a result. As a result, the interest can compound quickly and lead to a larger balance owed. Homeowners should consider the long-term financial impact of a higher interest rate before deciding to take out a reverse mortgage.

2. Fees Reverse mortgages often come with higher fees than traditional mortgages. These fees can include an origination fee, a mortgage insurance premium, and closing costs. These fees can add up quickly and can significantly reduce the amount of money the homeowner receives from the loan. You should be aware of all the fees associated with the loan before agreeing to the terms.

3. Loan Balance The loan balance on a reverse mortgage can increase over time. This is because interest and fees are added to the loan balance each month, and the borrower is not required to make payments on the loan. The loan balance can quickly grow to the point where the equity in the home is exhausted. If this happens, the homeowner may be forced to sell the property to repay the loan, or the lender may foreclose on the property.


4. Home Equity. Reverse mortgages can quickly eat away at the equity in a home. This is because the loan balance increases over time, while the equity in the home decreases. If you have plans to leave the property to your heirs, they may be left with little or no equity in the home. Homeowners should consider the impact a reverse mortgage will have on their home equity before deciding to take out the loan

5. Borrower Requirements. To be eligible for a reverse mortgage, the homeowner must be at least 62 years old and have significant equity in their home. However, the homeowner is still required to pay property taxes, homeowner's insurance, and maintain the property. If the homeowner fails to meet these requirements, the lender may foreclose on the property.


6. Non-Borrowing Spouse If a married couple takes out a reverse mortgage, and one spouse dies or moves out of the property, the loan balance becomes due. If the surviving spouse is not listed as a borrower on the loan, they may be forced to sell the property or face foreclosure. Homeowners should consider the impact a reverse mortgage will have on their spouse before deciding to take out the loan.


7. Housing Market Fluctuations. The value of a home can fluctuate over time. If the value of the home decreases, and the loan balance on the reverse mortgage increases, the homeowner may owe more on the loan than the home is worth. If this happens, the homeowner may be unable to sell the property or refinance the loan. This can leave the homeowner with few options and can result in the loss of their home.


8. Inheritance. If a homeowner takes out a reverse mortgage, they may be leaving little or no inheritance to their heirs. This is because the loan balance can quickly eat away at the equity in the home, leaving little or no equity for the heirs. Homeowners should consider the impact a reverse mortgage will have on their estate before deciding to take out the loan.


9. Scams and Predatory Lending. Unfortunately, like any financial product, reverse mortgages are vulnerable to scams and predatory lending practices. Some unscrupulous lenders may try to take advantage of vulnerable homeowners by charging excessive fees, offering loans with unfavorable terms, or pressuring homeowners into taking out loans they do not need. Homeowners should always research potential lenders and seek out the advice of a trusted financial advisor or attorney before signing any loan agreements.


10. Changes to Government Regulation. Reverse mortgages are subject to government regulations that can change over time. For example, in 2013, the Federal Housing Administration (FHA) made changes to its reverse mortgage program, reducing the amount of money homeowners can borrow and increasing the costs associated with the loans. Changes like these can impact the financial viability of reverse mortgages and may make them less attractive to homeowners.


11. Long-Term Care Needs. Reverse mortgages can impact a homeowner's ability to pay for long-term care. If a homeowner needs to enter a nursing home or other long- term care facility, the reverse mortgage may need to be repaid. If the homeowner does not have the funds to repay the loan, the lender may foreclose on the property. Homeowners should consider their long-term care needs before deciding to take out a reverse mortgage.


12. Tax Implications. The money received from a reverse mortgage is typically not considered taxable income. However, if the homeowner uses the loan funds to invest, the interest earned on the investment may be taxable. Additionally, if the homeowner sells the property, they may be subject to capital gains taxes. Homeowners should consult with a tax professional to understand the potential tax implications of a reverse mortgage.


13. Alternatives to Reverse Mortgages. Before deciding to take out a reverse mortgage, homeowners should consider alternatives such as downsizing, renting out a portion of their home, or seeking out other forms of financial assistance. These alternatives may provide a better financial outcome and reduce the risks associated with a reverse mortgage.

In conclusion, while reverse mortgages can provide financial relief to older homeowners, they also come with risks that should be carefully considered. Homeowners should be aware of the potential risks associated with reverse mortgages and should consult with a financial advisor or attorney before signing any loan agreements. With careful consideration and proper planning, a reverse mortgage can be a valuable tool for older homeowners looking to access the equity in their homes.

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