The Pros & Cons of Reverse Mortgages

By
Real Estate Mortgage Broker with Orange County, Corona, Riverside, Los Angeles NMLS#203003

Reverse Mortgage - Pros & Cons

Use the Right Tool

A reverse mortgage is a tool - a financial tool that works great in the right situation. You wouldn’t use a high heeled shoe to hammer a nail would you?.... or Scotch tape to connect two electrical wires?  You need the right tool (mortgage) that matches your plans for the future, your income, finances, and living situation. A reverse mortgage is one such tool that has it’s pros and cons. Let’s take a look.

Pros:

  • No Monthly Mortgage Payments are required on a reverse mortgage - ever. (But you can make paymenst if you choose to!)
  • You cannot outlive a reverse mortgage.  Even if the loan balance is more than the home value or you have taken all the mones out of your line of credit - Neither is cause for the lender to begin foreclosure.
  • No Minimum Credit Score requirements.  
  • No Income Requirements.
  • All borrowers must take Independent Counseling prior to obtaining the loan to be sure that they understand the loan and are aware of possible alternatives to a reverse mortgage.  
  • Borrowers retain ownership of their home - The lender only has a lien on the property like any other loan.*
  • There is never a  Prepayment penalty. Loan can be paid off at any time or even refinanced without penalty.  You can even refinance a reverse with a new reverse.
  • Line of Credit cannot be rescinded by the lender, regardless of equity or home values.
  • Line of Credit grows over time. This can be great for emergencies..
  • You can choose to receive the funds in equal installments, in advances through a line of credit or otherwise, in lump sums, or through a combination of these options
  • Non Recourse Loan - Any shortages at time of payoff due to value being less than amount owed are not a liability to the borrower or the estate.  
  • Flexible Options - Closed End Fixed Rate Reverse Mortgages available, Open Ended Adjustable Reverse Mortgages available.  Both Standard and the new lower cost SAVER available.
  • Interest Rates are close to traditional mortgage due to the fact these loans are insured byy FHA.
  • Most Living Trusts are acceptable and title may remain in the name of the trust.


Cons:

  • You children won’t inherit a free and clear home.* The loan will be due upon the death of the last borrower.  Heirs have 6 months to 1 year to payoff the loan before lender will foreclose.
  • If you should need to move to other housing, you may not have as much profit from the sale of your home due to the loan balance growing over time.
  • Upfront FHA Mortgage Insurance Premium (MIP) on the Standard Reverse is 2% of the home value up to a maximum of $12,510.00 on the SAVER it is .01% of the Home Value.
  • Loan Origination Fee - A Negotiable Fee regulated to a maximum of $6000
  • Ongoing Annual FHA MIP is 1.25% of the outstanding principal balance-added to loan mount. (Effectively raises the interest on the loan by 1.25%)
  • It is an age restricted loan - only homeowners over the age of 62 can obtain a reverse mortgage.
  • Lower loan to values than traditional financing - you won’t find an 80% or 90% loan.
  • Loan balance grows over time depleting your equity in the home.
  • Loan can become due and payable if taxes, insurance or Property Owners Association dues become delinquent*
  • Loan becomes due and payable when all the borrowers stop living in the home as their principal residence
  • Reverse mortgage is not available for second home or rental property.
  • Loan becomes due and payable if home is not maintained.
  • Loan becomes due and payable if HOA Dues are delinquent and in default.
  • Line of Credit can be frozen if borrower files for Bankruptcy.
  • Estate Planning issues - If the property goes into probate, the heirs may not have the legal authority to sell the home in order to payoff the loan.


Great independent links:

Department of Housing - HECM Loans
National Council On Aging - Home Equity Advisor
Counseling Agency

If you would like to discuss any particular scenario and the suitability of a reverse mortgage for you, a loved one or a client, please feel free to reach out to me. I love brainstorming!

* These things are also true of traditional mortgages.

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By Deborah Nance

Your Local Southern California Reverse Mortgage Professional

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Topic:
Lending / Financial
Location:
California
Groups:
Seniors Issues
Mortgages
communities for those 55 and better
True Mortgage Professionals
The FHA Mortgage Group
Tags:
reverse mortgage pros con

Comments 3 New Comment

Rainmaker
188,156
Dale Bledsoe
Realtor in Tracy, California
Crown Key Realty

Excellent post with excellent information. I have just arranged for a reverse mortgage professional to speak at or weekly Realtor's marketing meeting to eliminate some of the confusion and mis-information. Great Thursday post.

April 05, 2012 11:34 AM
Rainmaker
121,641
Deborah Nance
Southern California , Reverse Mortgage Specialist
Orange County, Corona, Riverside, Los Angeles

Thank you for the comment Dale.... and David Gold.  Thanks for catching that I forgot to put in the *explanation.

 

 

April 05, 2012 04:39 PM
Rainmaker
153,018
James A. Browning
MRE REOCertified(R) SSCertified
Browning Real Estate School/REO Institute

Thank you for sharing your blog; we need Real estate Professionals to share their comments and information regarding their markets and experiences. Thanks again from beautiful Colorado; Spring is here in the Rocky Mountains

April 28, 2012 09:19 AM
Rainmaker
121,641

Deborah Nance

Southern California , Reverse Mortgage Specialist
How Much Will You Qualify For?
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What You Want To Know & Need To Know About Reverse Mortgages - “The postings, statements and opinions on this site are my own and do not necessarily represent the opinions and positions of my employer, and/or it's affiliates."