Any time you use your home’s equity as collateral for a loan, you run the risk of losing more than your shirt! You run the risk of losing your home.
For that reason, any Home Equity Reverse Mortgage program needs to be thoroughly investigated and a potential borrower must understand the inherent risks. A prerequisite for any senior citizen, aged 62 or older, considering a reverse mortgage loan, is that he/she participate in counseling by a housing authority approved by the U S Federal Department of Housing and Urban Development (HUD).
Outlined below are some of the drawbacks to reverse mortgages.
Origination Fees and Other Closing Costs
These include the amount the bank charges for loan preparation, paperwork, etc. The sum of these charges may range from $2,500 to $6,000 (as is currently charged for the, FHA’s Home Equity Conversion Mortgage). Reverse mortgage closing costs can be expensive as well, and may include fees for a title search, mortgage insurance, property appraisal, surveys, termite inspection, flood inspection, and documentation fees. In some cases, a monthly service charge may also be part of the reverse mortgage loan agreement.
Your Home Will Be Used to Repay the Loan
If your plans were to leave your home to your offspring in your estate, remember that the loan does become once you move or pass away. At that time, the reverse mortgage (including accrued interest) is required to be paid. In many cases, in order to satisfy that financial obligation, the home is sold and the monies received are used to pay off the reverse mortgage.
A Reverse Mortgage Is a Major Financial Obligation
Remember that your reverse mortgage is an additional debt obligation and must eventually be paid ― either upon the borrower’s passing or when the home is no longer their primary residence (and is sold). Although a reverse mortgage might seem like a blessing in times of financial stress, this obligation can actually hinder your ability to obtain future financing.
A Reverse Mortgage Can Impact Your Medicaid
It’s important to note that a reverse mortgage may affect the Medicaid benefits of borrowers who are participating in this type of program. Potential borrower must be aware of any reverse mortgage payments that could influence their Medicaid Benefit eligibility. There are various opinions regarding this particular issue and it is recommended that you seek advice (from someone other than your lender) to determine any reverse mortgage penalties relative to your Medicaid eligibility.
Be Wary of Fine Print
The terms of the reverse mortgage contract must be thoroughly reviewed, to understand if there are any actions that would cause the loan to become due prematurely, whether the contract specifies that the home cannot remain unoccupied for a stated period of time, or if there are any consequences if the borrower finds themselves in the hospital for an unanticipated extended stay. Note that the borrower must continue paying property taxes and homeowners insurance throughout the term of their reverse mortgage.