I get the question a lot from prospective borrowers, “What are the disadvantages of a Reverse Mortgage?” It is a very easy question to answer because there actually are a few.
- Reverse Mortgages are Home Equity Loans and they will reduce the amount of equity you have in your home.
If you are in the market for a Reverse Mortgage, you probably are not trying to preserve long term equity, so this may not be a specific concern.
- Reverse Mortgages are currently insured by the Federal Housing Authority (FHA) so the collateral for the loan, your home, must meet the HUD minimum property guidelines.
This is particularly difficult in some instances such as with mobile homes and condominiums.
- Reverse Mortgages are difficult to obtain if your loan closes with your property in a trust.
In most cases, trusts will need to be revised to reflect specific language allowing the reverse mortgage and all of the beneficiaries must be age 62 or older. Trust revisions are usually done by estate planning firms and can be costly.
- Reverse Mortgages can only be refinanced under special circumstances, showing a specific net benefit to the borrower.
Once you have a reverse mortgage, you may have difficulty refinancing it until your property value increases at a higher rate than your loan interest rate.
- Reverse Mortgages are difficult to obtain on newly purchased homes.
Most lenders want to see a 6 month chain of title to make certain there is no straw-buyer or loan fraud involved.
- Reverse Mortgage counseling can be misleading.
Although counselors today are much better trained than ever before, there is still the occasional slip of the tongue and misinformation regarding program benefits and illegal lender recommendations.
- Reverse Mortgages are very different than traditional mortgages and mortgage professionals are usually not the best reverse mortgage consultants.
Reverse mortgage consultants with a background in financial planning do the best job in the reverse mortgage business.
- Once you have a reverse mortgage, you cannot get a second mortgage or equity loan
Reverse mortgages are required to be the only mortgage on title at any given time. If your home equity increases after the reverse mortgage, your only option to access more cash is to refinance the reverse mortgage.
- Today’s fixed rate Reverse Mortgages usually require a lump sum payment at closing.
Managing a large, six figure sum of cash can be a daunting task for some of us. The risk of theft, fraud or mismanagement is always greater with large sums of cash.
- Reverse mortgages require the borrower(s) to live in the home as a primary residence.
In some cases, there may be a decision made to buy another home or move into other living arrangements. Under the terms of the Reverse Mortgage agreement, the borrower(s) must pay back the loan in full (usually by selling the home) if they no longer plan to live in the home as a primary residence. Additionaly, Reverse Mortgages currently cannot be done on second homes and other property that is not deemed a primary residence.
Michael Manfredi is a Reverse Mortgage Specialist
Phoenix, AZ 85020
(602) 456-0009
(888) 697-5556
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