Reverse mortgage contracts can have hidden costs, such as fees, and interest can consume the accumulated value of your home. Unless you're careful, you could risk losing your home or having it passed on to the lender when you die instead of to your heirs. However, there are disadvantages, such as the complexity of loans and their significant expense. When a reverse mortgage stops paying and the loan is paid off, older people are at risk of losing their homes to foreclosure.
A reverse mortgage is a mortgage loan that allows eligible borrowers to apply for loans with the equity of their home. Here are four situations where a reverse mortgage might be a good option and four in which it might not.
Reverse mortgageapplications increased by 15% in March compared to the previous month, as people turned to loans to avoid resorting to investments for retirement in a falling market. Unlike traditional (or “term”) mortgages, a reverse mortgage doesn't require the borrower to repay the loan as long as it meets certain conditions, such as maintaining their home and paying property taxes and home insurance.
If you may have to move for reasons of health or disability, a reverse mortgage is probably not wise because, in the short term, your initial costs are unlikely to be amortized. Keeping up with property taxes, homeowners insurance and home maintenance is essential if you have a reverse mortgage. Heirs who want to keep the home have the opportunity to pay the balance of the reverse mortgage to the lender. Home equity conversion mortgages (HECM), the most common type of reverse mortgage, have several unique fees and ongoing costs.
A reverse mortgage could also stop paying if the borrower no longer occupies the home as a primary residence or hasn't kept it in good condition. Reverse mortgage underwriting guidelines require the borrower to maintain property charges and to occupy their home as their primary residence. Some borrowers use the proceeds from the reverse mortgage to pay for the costs of in-home care or to help reduce the burden that children or other family members bear as caregivers. One of the advantages of a reverse mortgage is that lenders generally do not impose income or credit requirements.
The vast majority of reverse mortgages are provided under the Home Equity Conversion Mortgage (HECM) program, administered by the Federal Housing Administration (FHA). Homeowners facing financial difficulties due to the current economic crisis caused by the coronavirus pandemic may also be considering a reverse mortgage to supplement their income. A reverse mortgage is intended for homeowners who have paid off their mortgage or who have accumulated a large amount of mortgage equity.