Reverse Mortgage Pros & Cons: Sinister Lending or Good Financial Move?

by on February 9, 2012The Realestate.com Team

reverse mortgages pros & consRobert Wagner pitches reverse lending on TV, but are these loans as shady as the fate of his former wife, Natalie Woods, or a smart financial move that will have you living like a star?

Reverse mortgages have been attracting an increasing amount of interest from homeowners in the last couple of years, but it’s time to investigate and have a real “Hart-to-Hart” about their pros and cons.

Reverse Mortgage Pros:

The Easy Way to Tap Home Equity

After several years of economic turmoil and tightening of underwriting guidelines, for many it may not be a matter of weighing reverse mortgage pros and cons, but this may be the only way to tap into home equity. As there are no repayments required to pay off reverse mortgages, and borrowers may be receiving funds from their loan on a regular basis, credit and income are not factors in loan approval. Providing you are over the age of 62 and have a significant amount of home equity, you should be a good candidate for a reverse mortgage loan.

Live Like a Hollywood Star Now

Even with a solid equity position, many U.S. homeowners can find it extremely difficult to sell their homes for near what they paid for them. No one likes taking a big loss. So if you need a lump sum of cash now to cover medical bills, help out a family member, or just need to increase your monthly income to cover everyday living expenses or maintain the lifestyle you are accustomed to, a reverse mortgage may be just what you need.

Flexibility

The reverse mortgage offers flexibility. For example, the Federal Housing Administration (FHA) Home Equity Conversion Mortgage (HECM) offers five different options for accessing home equity. The borrower can choose between:

  • Tenure: The borrower receives monthly payments for life.
  • Term: The borrower receives monthly payments for a fixed amount of time.
  • A line of credit: The borrower can make withdrawals, up to a maximum amount, whenever he or she chooses.
  • Modified tenure: A combination of the tenure and line of credit options.
  • Modified term: A combination of the term and line of credit options.

Peace of Mind

Perhaps the most important factor of all to consider when weighing reverse mortgage pros and cons is peace of mind and financial security. By choosing an option that  includes fixed monthly payments, you will never have to worry about not having the steady  income you may have lost when you retired. If you don’t need the extra cash to spend now, it could come in handy for life’s small emergencies or beginning to gift your assets to your heirs with minimal tax consequences and ensuring that it really gets into the hands of those you care about the most.

Reverse Mortgage Cons:

Fees and Costs

When it comes to reverse mortgages pros and cons, many point to the front-end loan costs as a negative, , especially when opting to take regular income payments over a long period of time. However, before homeowners allow this to scare them off, they should weigh the true cost of other options like selling and paying a real estate agent commission or refinancing. In reality, a reverse mortgage will still often be the most cost effective choice.

What Will I Leave the Kids?

Many seniors worry that by tapping into their home’s equity they deplete assets that can be left to their children. Loan expenses due at the end of the loan, either when the homeowner dies or sells the house, can significantly eat into whatever equity remains. This is a valid concern and one that should be discussed with your accountant.

The Mortgage Interest Deduction

One of the benefits of reverse mortgages which lenders frequently highlight is the mortgage interest deduction, which can essentially makes proceeds from these types of loans tax free and can help to offset other tax liabilities. However, as the government struggles to reduce the national debt and spending, many fear that the mortgage interest deduction could be one of the first things to go. So you may want to speak with your accountant if this is a factor in your decision to pursue a reverse mortgage.

Effects on Government Assistance

Robert Wagner may never have to worry about having to apply for Medicaid, but you might. Depending on your circumstances, the income from reverse mortgages could affect eligibility for various forms of government assistance and is definitely something that should be taken into consideration.

Unveiling the Cover-Up

Tapping into your equity now can obviously have effects on your financial future. However, there are some skeletons in the closet too. In the past some reverse mortgage lenders have developed notorious reputations for predatory prepayment penalties. Some homeowners who lived longer than they expected and wanted to cash in on surging equity during the recent boom found clauses in their loan documents that entitled lenders to a large percentage of any increase in property value when the loan was closed out. In some cases this amount was hundreds of thousands of dollars.

In summary, when analyzing reverse mortgages pros and cons, homeowners should recognize that the right decision all comes down to their personal circumstances. Then, should you decide you’d like to learn more about the process and how it may benefit you, contact the United States Department of Housing and Urban Development (HUD). They will direct you to a HUD-approved HECM counselor who will answer all your questions and guide you in the right direction.

{ 18 comments… read them below or add one }

rosalyn eisner June 30, 2014 at 5:07 am

I have no mortgage on my home and 17 acres. how does rm work when there is no mortgage.

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terri landry July 24, 2013 at 3:56 pm

my question is I signed up for reverse mortgage but before I agreed I had my home appraised and was told it was valued at 58,000.00 then I had One Reverse Mortgage do there appraisal and I was told by them my home appraised for 40,000.00 and they could only let me have 20,000.00 why is there value is so much lower then the appraisal I had done..?

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Daughter July 14, 2013 at 5:02 pm

My parents are looking to purchase a new home (condo). They would like to get a “reverse mortgage purchase”. This mortgage would require them to put approximately 40% down and not have any mortgage payments. The HUD guidelines require a condo to be on their FHA approved condo list. The list is limited. Do you know if any conventional lenders provide “reverse mortgage purchase” on condos. Thank you.

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Kathy Smith July 10, 2013 at 8:38 am

My parents bought into a Reverse mortgage on a home valued and purchased (at the time, no longer now) at 199,000. They only owed 25,000 at that time. Five years have passed and they used some of this money and now this RM is about 100,000. My concern is what if they live another 10 years (and they could, they are 74 and in good shape) and what is owed becomes more than the house is worth. Will the bank then ask them to begin paying the mortgage? Will the family be responsible after they are deceased to pay this difference?
The paperwork is very vague on all of this.. THANKS!

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Shelbie Lewis September 4, 2013 at 8:44 am

My understanding is that the heirs are not responsible for the debt after the death of the owner(s). If there is more owed than the value, the property is turned over to the bank. If there is equity, the property can be sold and any equity received from the sales goes to the heirs or estate as designated by the will or court. If more is owed than valued the heirs have the opportunity to purchase the property at 95% of the fair market value. This would come into play if the property was “family” land or house that would have a sentimental value to the heirs.

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Mike June 29, 2013 at 11:59 am

I may be interested in a reverse mortgage. I owe about 118,000 on house worth about 165,000. my interest rate is about 3.5% so that part is good. However I am soon going to be on fixed income as I am being laid off, and most likely will not be called back to work, but I do have a pension I can draw from. Would a reverse mortgage be right for me?

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b. brandt October 1, 2013 at 5:03 am

You need to have any contract proposed for a reverse mortgage reviewed by your own attorney and you need to understand that you will have two leins if you have FHA and a bank. The law permits you to see the contract before the day you go to closing and sign the contracts. Check with HUD about that law. You also need to be aware that the interest rate of an ARM will probably be promoted as a real bargain because it is the same as the Treasury rate but the truth is that the rate for FHA is incremental and increases very rapidly over time. You should also have counseling face to face and never phone and if possible, you should take a lawyer with you. I know this sounds extreme but it will probably save you thousands if you decide to get a reverse mortgage. Going it alone leaves you blind. I know because in 2008 I closed with Countrywide and the broker was very slick encouraging me to use my equity to fix my house. He told me I did not need a set aside to do this and turns out, the appraiser said I had no need for repairs. “FHA standards are different for you because you own your home” was the lie. FHA standards, aside from paint, are identical and the reason for this deception was to get access by the bank to a home that was going to require that I use my equity to fix it. The lawyer never mentioned Fannie Mae, was slick about keeping the contract at her end of the table and I was told a fantasy about the loan. I made a huge mistake. I have no principal left now. I have a home that was fixed that needed 1926 wires replaced, new lead free plumbing, a old slate roof replaced, no gas shut offs etc. So many things to bring the hosue to CODE. FHA would not have ever approved this loan had underwriters not been involved. CFPB has many warnings and publicans about the exploitation of consumers and you should read it all. I owed $88K when I got this loan and twice as much now and there is no principal left. That means that now the interest on the Fannie Mae loan is creating more debt! The interest is much higher on the equity I used then the loan I signed. I never understood that if I used my equity that I was creating a new separate debt with higher interest. I believed that the lawyer protected me because the broker said so. I believed that the loan would help me fix my house so I could sell it someday and retire. Now all I can do is sell it immediately so that I can walk away with a $5K if I am lucky. And the banks just pass around your loan and each time there are fees, all sorts of costs that are simply impossible to understand unless you are an accountant. This product is not for the average person that needs to live in a safe and less stressful environment. This loan is only for wealthy people who have a huge safety net and can afford an attorney to make sure that there is accountability of appraisals. Once you become involved with this type of scam, it is most likely not going to be resolved because it involves Fannie Mae and they do not evidently get involved with underwriters or accountability of banks. You are the mark.

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Alice Tuttle May 21, 2013 at 1:04 pm

In my opinion, a reverse mortgage is a nightmare.
If anyone knows of a way to get a conventional mortgage
to pay a reverse mtg. off, I would love to hear from you.
My problem is that all my house equity is gone due to
interest being added to the principal borrowed. I have
a fixed 6.25 int. rate. I do have some savings but to
use it to pay the loan down will leave me with a payment
and no savings.

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Shelbie Lewis September 4, 2013 at 8:48 am

Why worry about paying it off unless you want to move. You have no payment and can live there until you have to more or die! Whatever you do, don’t take your savings to pay down the loan. That would be of no benefit to you.
If you want to move, sell the house for whatever it’s worth and the bank takes what it gets…you’re off the hook. To my understanding, there is no recapture…but check the documents you signed to be sure…the program has changed within the last few years.

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Becky May 1, 2013 at 2:33 pm

My Mother obtained a reverse mortgage. My understanding for her was that she would pay off some minor bills and be able to live a little more comfortably on her limited income. She, since obtaining the RM, has become mentally unstable (diagnosed early dementia). She has spent all of the equity in her home on her home. In her mind she was thinking my sister and I would want the home. She didn’t realize that once she spent the money, it would basically belong to the bank. My sister and I are on fixed incomes and there is no way we can afford to buy back her home. The homes in her neighborhood are not worth what she owes. If she could get $40 thousand, that would be about average for her neighborhood. Her RM is now up to $119 thousand. So, I feel RMs are not good for elderly and that perhaps people should be evaluated mentally before being allowed to obtain the RM. I don’t want my Mom’s house, but she is now where when she has to be put in a home, she has no money to put herself in a decent facility. So sad.

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Angela October 19, 2012 at 6:40 am

I’m trying to purchase back the reverse mortgage loan on my Grandmother house. My Grandmother did take the required counseling and her understanding was that my son only had to start making payment at her death. Not that he had to get an new home loan on her house. Because he already has an morgages loan on his home . To purchase the home back he has to get an new conventional mortgages loan and put 20% initial down payment plus closing cost.

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dave June 5, 2013 at 5:35 am

I’d be tempted to skip the paperwork and just continue paying the reverse mortgage.

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Shelbie Lewis September 4, 2013 at 8:51 am

The requirements have changed. Heirs can now purchase the property with a 95% LTV mortgage…FHA. Heirs are not required to make any payments after the owners death other than to pay taxes and insurance. Otherwise, the property can be turned back over to the bank regardless of the balance. Any equity after a sale will go to the estate or heirs.

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Bill Tomacrh September 6, 2012 at 10:58 pm

Can I get a reverse mortgage if I don’t have any equity — I mean Can I buy a house ( 80,000.00 ) from the get go with a reverse mortgage — I might be able to put 10,000 down The house is an estate house my — mom died — and If I buy It I would owe my brothers sisters their part of it —- a total of 60,000.00 split three ways – they have agreed to reduce the price from 80,000 to 60,000 — for my part

Bill

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Shannon O'Brien September 18, 2012 at 8:18 pm

Hi Bill,

Thanks for the question. Here are the requirements for an HECM purchase loan:

The youngest person on the title must be 62 years of age or older.

The home must be your primary residence and you must take occupancy within 60 days of closing.

The difference between the purchase price of the home and the loan proceeds have to be paid in cash from either the sale of a previous residence, your other assets or savings.

You must complete a HUD-approved counseling session.

Hope this answers your questions.

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Jack September 5, 2012 at 9:05 pm

Often times accessing the equity in a senior’s home could provide them with the quality of life they’ve struggled to find up until that point. A counselor visit generally is one of the best tools for understanding the product and determining if it is the best choice for you, specifically the consumer.

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William Sandage July 10, 2012 at 5:57 pm

i am looking to do a reverse mortgage and have taken the required counseling already and am looking for a lender that does modular homes and mobile homes

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reverse mortgages pros and cons June 14, 2012 at 4:16 am

this is a great look at the pros and cons of the reverse – we have an entire site dedicated to this sole subject – great work here

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