7 Reasons Reverse Mortgages Can Be Dangerous
It’s almost impossible to watch TV today without seeing commercials advertising reverse mortgages, many of which feature celebrities past their prime, such as Henry Winkler, pushing the benefits of “guaranteed tax-free income” for seniors.
What these commercials fail to tell you is reverse mortgages can be very dangerous and put your home at risk.
What is a Reverse Mortgage?
What is a reverse mortgage, exactly? Basically, it’s a loan product only for homeowners who are 62 or older. There are no restrictions for how reverse mortgage proceeds may be used, and the loan gets its name because, rather than making monthly payments to the lender, the lender makes payments to the homeowner.
The income stream is a loan against the home’s equity, and it must be paid back if the home is sold or vacated. As long as the borrower remains in the home, they do not need to make any monthly payments toward the balance.
When the borrower dies or sells the home, the balance, interest and accrued fees on the loan are taken from the sale proceeds, or must be paid in full by any beneficiary who wishes to keep the house.
That may not sound so bad. After all, you get to stay in your home and get a check every month. What could go wrong? Quite a bit actually.
1. Mortgage is due if borrower needs a care home
Payments on the reverse mortgage are only held at bay if the borrower stays in the home. What happens if the homeowner needs to leave the home to move into a nursing home or assisted living facility? The mortgage will become due immediately. Seniors may be left homeless struggling to pay on a mortgage along with the high cost of home care.
2. Any dependents in the home can be affected
If the borrower dies or leaves the home for a facility, anyone left in the home must either be taken in by someone else or go to the care facility. Non-borrowing spouses are most likely to be affected, as they are considered tenants of the reverse mortgage rules and they need to leave when the borrower does.
3. The reverse mortgage can go into default
How can a reverse mortgage go into default if the borrower doesn’t make monthly payments? Easy, if the elder fails to pay property taxes, keep up insurance on the property or fails to maintain the home, according to reverse mortgage rules. If any of the above occurs, the lender can foreclose. Lenders are in a great position here and more than willing to do so, as they are getting the property cheap and can sell it for a profit.
4. Heirs must pay off the loan to get the home
When the borrower dies, the entire principal, fees and interest must be paid in full before any heirs can take possession of the home. This debt can easily exceed the market value for the home. If the heirs can’t pay, the lender will foreclose and sell the home.
If you hope to give children, grandchildren or anyone else an inheritance that includes your home, a reverse mortgage will most likely destroy this possibility.
5. Spousal eviction is a very real risk
If only one spouse’s name is one the reverse mortgage contract, the house can be sold out from under the surviving spouse if the borrower dies. Every reverse mortgage requires immediate payment upon the death of the borrower. If repayment of the full loan balance is impossible, and it usually is, the house can be sold to repay the loan balance and the surviving spouse may be left homeless.
One couple, Linda and Jim of Wisconsin, got a reverse mortgage in 2005 on a home they purchased in 1993. Only Jim’s name was on the contract, as Linda was not yet 62. When Jim died, she received a notice from the lender within 2 days telling her the loan was due. She had no claim to the property and was evicted from her home of 19 years.
Reverse mortgages have a 9.8% foreclosure rate, which is four times higher than the rate for traditional mortgages.
6. Lump sum payments are dangerous
While borrowers can choose to get monthly payments with a reverse mortgage, 70% choose a lump sum payout. This money is often spent long before the homeowner needs to worry about late-in-life difficulties.
7. Reverse mortgages have high fees
You will need to pay loan-related fees to get a reverse mortgage, and the origination fees and other costs for a reverse mortgage are very high. Because reverse mortgages aren’t decided based on income or credit, lenders often make up for this by charging higher fees at the start.
Along with the high fees rolled into the loan, expect to pay very high interest rates well above the going rate for a traditional home equity loan. While the reverse mortgage is supposed to give you your equity in the home, the bank ends up getting a great deal of it.
Think Twice Before Getting a Reverse Mortgage
If you’re considering getting a reverse mortgage, be careful. Consider all potential consequences, including the high costs and what will happen if you need to leave the property. In general, reverse mortgages are best for seniors who have no heirs they wish to leave the home to. Consult with a financial adviser and attorney before making your decision, because you will be putting your biggest asset at risk.