Is a Reverse Mortgage the Best Option?
I think you’ll agree with me when I say…
When it comes to financial products, you can never be 100% that it will help you solve all your issues.No product that is 100% perfect, and even though reverse mortgages save you from financial stress, they have certain drawbacks.
Well, after more than ten consultations and hundreds of consumer reviews, here is a comprehensive guide on the pitfalls to taking out a reverse mortgage.
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Why Reverse Mortgages Might Not Be What You Are Looking For?
Since we ushered in a new century, reverse mortgages have been the answer to many retirees’ prayers, hopes and dreams.
Today, home owners aged 62 year and above are enjoying financial security with this powerful monetary tool in retirement, reverse mortgages.1
Reverse mortgages are incredible since they have unique features like the eradication of monthly mortgage payments, relief from one of your most substantial monthly expenses, and better control over your finances.
However, just like with other mortgage plans, reverse mortgages come with some restrictions and cons. Here are some of the conditions and drawbacks you can expect with a reverse mortgage scheme and the considerations to aid you in your obligations while enjoying this flexible financial tool.
#01. Upfront Costs and Interest Rates
If you compare costs2 you incur for procuring a regular home loan; then you will see that reverse mortgage costs are greater due to their structure. You must pay closing costs, lender fees, mortgage insurance premiums3 , and finance charges, which can add up.
Moreover, depending on your lender, reverse mortgages have more interest charges. Theirs, according to a couple of surveys conducted by several financial institutions, tend to be 1.5% higher than standard home mortgages.
#02. Inheritance Issues
Reverse mortgage aren’t the most excellent choice if you intend to make your home as part of a trust. That’s because they do not only draw on the value of your estate’s equity, but they’re also due immediately upon your death.
Therefore, if you want some, or all of your property to your heirs, then you need to consider to opt paying the loan in full or paying 95% of the balance (if you or your family wishes for it to remain in the family). If your kindred are unable to settle the debt with their funds, your lender will have to sell the home to repay the mortgage. Once you pay the debt, any proceeds will then go to your estate.
Nonetheless, reverse mortgages are also payable whenever you decide to put up your home for sale -so if your retirement comprise of living anywhere other than your current residence, you will have to fork over the balance of the loan when you get a buyer.
Therefore if you want to safeguard your heirs then be sure to:
- Talk to them about your retirement and keep the line of communication open to make sure that you’re all on the same page in regards to their right and how you’re planning to use the released equity.
- Make sure that they fully comprehend the possible outcomes at loan maturity.
- Inform them about what their future options will be when your reverse mortgage loan becomes due and payable. They can choose to sell the estate, use funds to repay the loan and then keep the funds after loan payoff.
#03. You Can Be Prone To Facing Foreclosure When the Older Spouse Dies
When defining your eligibility, your lender will consider your age.
- Age is a critical term for two reasons:
- The older you are, the higher the loan amount you qualify for.
For that reason, 40% of couples agree to only include the name of the older partner on closing documents, ignoring the fact that the surviving spouse could face loss if the other passes away.
According to the Consumer Financial Protection Bureau (CFPB), most reverse mortgage clientele reported that providers falsely guaranteed them that they would be able to put on the younger spouse to the loan at a future date.
Thus, you need to ensure that you read the fine print and clarify this concern before signing on the dotted line.
#04. Your Home Is Still Your Financial Responsibility
You are responsible for fulfilling the agreed-upon loan requirements, like continuing to pay property taxes, homeowner’s insurance, and working on maintaining necessary home repairs, or the loan may go into default.
Yes, you get to have 100% ownership of your home still,and you pay no monthly mortgage payment. However, along with you owning the estate, there come the typical responsibilities associated with it, like ensuring you cater to the homeowners’ insurance and property taxes.
Fortunately, there are a few steps you can take to prepare for this financial responsibility.
So before you head on to make any final decisions make sure that you:
- Review all your sources of income and make sure that you have the financial ability to accomplish all loan commitments
- Make a financial plan for how you can manage to pay for these costs, and remember that you can always use reverse mortgage funds too
- Carefully plan for your reverse mortgage funds and have a portion set-aside to make sure that you in these loan responsibilities.
#05. It Can Affect Your Government-Based Assistance/Means-Tested Benefits
By releasing the equity4 , you automatically increase your income or savings. However, this can adversely have ripple effects and affect your claim to your means-tested benefits and need-based government assistance like Social Security Income (SSI).
#06. It Can Be Difficult Trying to Qualify for Other Loan Types
According to FCA,5 you cannot refinance a reverse mortgage,and in addition to that, this scheme might also hurt for you to qualify for other types of mortgages.
Over time, the growing interest on reverse mortgages drains any remaining equity in your residence. Worse, some homeowners regularly complain that they were oblivious to the terms these loans have. Therefore, CFPB, HUD and FCA recommend that before you agree, you need to seek the guidance of a trusted third-party reverse mortgage professional.
HUD even goes ahead to provide you with a directory of HECM counselling agencies.
Additionally, some CFPB reports indicate that some homeowners have been encountering difficulties when attempting to repay their mortgages –some lenders are failing to keep correct records. They also face obstacles when trying to avert foreclosure – the lenders take their time in responding to their concerns (which is critical during this), unresponsiveness, and receiving erroneous information or directives.
Therefore, be sure to have your adviser and solicitor offer you unbiased advice before signing the contract. You should also conduct some due diligence before committing to a specific lender.
If you need to supplement your pension and maintain your lifestyle, taking out a reverse mortgage might seem like most appealing. However, you need to chat to your adviser and weigh your options before committing to an irreversible decision. You have to do your homework first and comprehend the resources at your disposal.
If it’sn’t your cup of tea, you should then consider other alternatives given the fact that interest charges can sky-rocket or you might have to give up some tenure.
You can opt to take out an equity release or even downsize to a smaller home.
When it’s all said, however, the decision is yours. Make sure that you consider getting impartial specialist advice about whether the scheme is suitable for you, and if it’s, which is ideal for your circumstance.
For this and more information, you can click here to see how much equity you can release and chat with an expert.
How much money could you release?
A reverse mortgage plan allows you to access the value of your home, tax-free without having to sell up, so that you can have money to spend on whatever you want or need.