Reverse Mortgages Pros and Cons

pros-cons-intro

Reverse Mortgage Pros and Cons

When talking about Reverse Mortgage Pros / Cons, it pays for borrowers to stay up to date on the latest developments.  There are still some things for borrowers to watch out for, the Pros are getting better all the time...

Reverse mortgage loans are meant to be the last loan a borrower will ever need.  One of the Cons often associated with reverse mortgages is the high cost of the loans.  The costs are all front-end loaded, which means that if the loan is repaid in the first few years, the loan can be a very expensive loan for a short-term need.  One of the single highest costs of any reverse mortgage loan is typically the HUD Up-Front Mortgage Insurance Premium (UFMIP) which historically has been 2% of the property's appraised value.  At the current maximum HUD lending limit or $625,500, that is a single fee of  $12,510.  Add that to the origination fee which can fun as high as $6,000 and the local title and miscellaneous costs and your reverse mortgage fees can be well over $20,000 to start the loan in some areas of the country. (Use this free reverse mortgage calculator to estimate your available loan)

Now for a couple of reverse mortgage pros that have really taken a lot of the sting out of the costs.  Firstly, HUD introduced the HECM Saver program for borrowers who do not need all the funds that they would normally receive under the Standard Program.  Many borrowers do not end up using all their reverse mortgage funds anyway so why pay the UFMIP if you do not have to?  Instead of  2% (or $12,510 at the highest level), HUD charges just .01% for the UFMIP (or $$62.55 for that same loan amount).  The amount of the UFMIP is so small, some lenders just pay it for the borrower.

Another reverse mortgage pro is based on market conditions.  Many lenders are now willing to waive a portion or all of the Loan Origination Fee.  Loans that used to cost borrowers thousands of dollars can now be had in many instances for zero origination fee.  Borrowers should check around and compare rates and fees as a loan that once could cost over $20,000 may be had for $2500 in many parts of the country (depending on local and state closing costs).  Even if the Saver Program does not work for your circumstances, the secondary market conditions may allow you to take advantage of a loan with no origination fee.

Another current Con with reverse mortgages relates to out of pocket costs and current legislation.  The Dodd-Frank Act has changed the way many companies do business and therefore there may not be as much leeway in the way appraisals and other costs are paid.  Borrowers should pay attention to what costs need to be paid in advance and what can be taken from the loan proceeds.  Most costs can be subtracted from the proceeds but typically up-front costs of counseling (if free counseling is not available) and appraisal must be paid by the borrower.

A Pro that comes with a caveat is that often there are credits available to help offset these costs.  The caveat is that most of the time the lender is going to require the borrower to take a higher interest rate to obtain the credits.  In a sub-five percent market, the higher rate will not affect the amount of money a borrower receives so some proposals look great with a small credit but this is where a borrower really needs to also look at the Amortization Schedule.  A higher rate can sometimes cost thousands and tens of thousands of dollars over the life of the loan and so unless it's absolutely needed, the lower rate is usually better for the borrower and their estate in the long run.

Some of the reverse mortgage cons that have been around as long as the reverse mortgage itself still remain today.  The borrower accrues interest on the outstanding balance and since the balance grows, the typical borrowers ends up paying interest on the mortgage insurance and on interest already accrued.  If a borrower depends on a need-based program (such as Medical in California where the borrower cannot have over $2,000 in their bank accounts), then the borrower cannot take al the proceeds out of their reverse mortgage loan and place them into a bank account as the assets would make them no longer eligible for the program.  Borrowers who take large sums of cash out of their property all at one time accrue interest on the entire balance quicker and run the risk of losing those funds if they become prey to faulty investments (and it doesn't take a scam to lose money these days on investments). 

You also need to be very wary when changing title to obtain a reverse mortgage (or any loan for that matter).  Some borrowers remove a younger spouse to obtain the higher benefits but then when something happens to the older spouse, the younger spouse is left with having to pay off the mortgage or sell the home.  There are also sometimes real estate tax implications that a borrower should contact a trusted real estate tax attorney to discuss prior to adding or removing names from title.  This can also be true with deceased spouses.  Any time title is to change, you should always consult an attorney to determine if there will be any tax ramifications from the change prior to making the changes.

The Pros are that HUD has helped borrowers with programs such as the Saver Product that greatly reduces the up-front costs.  Many borrowers have been able to close their loans with little or no up-front cost and without raising their rates through the roof.  As long as borrowers keep their program requirements in mind, even borrowers who rely on financial programs can successfully obtain reverse mortgages and make their lives easier by only taking the necessary funds and not allowing money to accumulate in bank accounts.  Borrowers can live in their homes for life without having to make a monthly mortgage payment (they are still responsible for the taxes, insurance and maintenance), but since reverse mortgages are always free of prepayment penalties, borrowers can choose to pay all or any portion of the loan at any time without penalty.  This means that borrowers can use the loans in their financial planning - paying on the loan in years when they need tax write off's and not paying when they need to keep the cash on hand. 

Homeowners can now choose between fixed rates and adjustable rates.  The fixed rates are closed end loans and must be taken all at one time, but the adjustable rate loans can still be taken as a lump sum; a line of credit; a payment for a set term/ life of the borrower; or a combination of all of the above.  And the line of credit can never be closed or reduced at the whim of the lender as is the case with a Home Equity Line of Credit through a bank.  And finally, the HUD reverse mortgage is a non-recourse loan.  Regardless of what happens in the real estate market, how long you live in your home without ever making a monthly mortgage payment, you and your heirs can never be required to repay more than the property is worth, regardless of the loan balance.*

            *Borrowers choosing to move and leave their home would receive the
            outstanding balance as a loan payoff amount.  If the value was below the
            current value, borrower would have to decide whether to pay off amount
            owed or allow lender to foreclose at which time no deficiency judgment
            could be sought but it would show on borrower's credit as a foreclosure.

Is the loan right for you or our family?  That's for you to weigh the reverse mortgage pros and cons as they relate to your circumstances to make that decision.  They are not right for everyone, but for thousands and thousands of senior homeowners, they have been the choice that has allowed them to stay comfortably in their homes and it may do the same for you.

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