It’s almost impossible to watch the TV and not see a celebrity discussing the many benefits of reverse mortgages and what they provide for older Americans.
Reverse mortgages can be a useful financial tool for some homeowners, particularly those age 62 and older who want to access the equity in their homes without selling. However, reverse mortgages come with several potential risks that should be carefully considered.
Complexity and misunderstanding: Reverse mortgages can be complicated, and many borrowers may not fully understand the terms and conditions. Misunderstanding the intricacies can lead to financial difficulties.
High fees and costs: Reverse mortgages often come with high upfront costs, including origination fees, closing costs, mortgage insurance premiums, and servicing fees. These costs can significantly reduce the net proceeds available to the borrower.
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Interest accumulation: Interest on a reverse mortgage accrues over time, which can rapidly increase the loan balance. This can significantly reduce the equity in the home, leaving less for heirs.
Impact on inheritance: Because the loan balance grows over time, the amount of equity left in the home can substantially decline, affecting the inheritance left to heirs. Heirs may need to sell the home to repay the loan.
Potential for foreclosure: If the borrower fails to meet certain requirements, such as maintaining the property, paying property taxes, and keeping up with homeowners’ insurance, the lender can foreclose on the home.
Impact on government benefits: Receiving funds from a reverse mortgage can affect eligibility for certain government benefits, such as Medicaid and Supplemental Security Income (SSI). It’s important to understand how a reverse mortgage could impact these benefits.
Moving or selling the home: If the homeowner decides to move out of the home or sell it, the reverse mortgage comes due. This can be a problem if the home’s value has not appreciated enough to cover the loan balance or if the borrower needs to move to a care facility.
Housing market risks: If the housing market declines, the value of the home may not cover the loan balance when it comes due, potentially leaving heirs with no equity or even owing money.
Requirement to live in the home: The borrower must live in the home as their primary residence. If they move out for more than 12 months, even for medical reasons, the loan becomes due.
Decreased flexibility: Once a reverse mortgage is in place, it can limit the homeowner’s options for future financing or selling the home due to the accumulating debt.
Counseling requirement: While counseling is mandatory, the quality and comprehensiveness of the counseling can vary, potentially leaving some borrowers without a full understanding of the risks and responsibilities involved.
Considering these potential pitfalls, it is crucial for homeowners to carefully evaluate their financial situation, long-term plans, and alternatives before opting for a reverse mortgage. Consulting with a financial adviser or counselor who is experienced with reverse mortgages can help provide valuable insight and help make an informed decision.
This is intended for informational purposes only and should not be construed as personalized financial advice. Please consult your financial professional regarding your unique situation.
John Ruedi is a regional marketing specialist with Savant Wealth Management in Bloomington.
