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The Pitfalls of a Reverse Mortgage

Updated on August 17, 2014
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What is a Reverse Mortgage

First, let me define what a Reverse Mortgage is:

A Reverse Mortgage is an FHA Loan offered to seniors who are 62 years of age and older. It's different than a conventional mortgage where you have to pay monthly payments to pay back the loan. With a Reverse Mortgage, you don't make any monthly payments while you are living in the house. But the loan needs to be payed back when you sell your house or pass away.

How It Works:

With a Reverse Mortgage, the lender uses a portion of the equity of your home as collateral. For example; say your house is appraised for $130,000 and your equity is $98,000, you are allowed to take the $98,000 in three ways. You can take a lump sum of the full amount, a line of credit, or receive monthly installments until the $98,000 is exhausted. You can also combine any of the three ways to meet your needs.

Reasons People Get a Reverse Mortgage:

  • Those living on a limited income
  • Pay off Debts.
  • Take vacations
  • Home Improvements

Reverse Mortgage Pitfalls!!

What They Don't Tell You:

  • The process of getting a reverse mortgage is like buying a new house. You must have the house appraised, inspected for termites, pay insurance fees and closing costs. Some lenders will incorporate these fees into the loan. The interest rate is either a fixed or adjustable rate.
  • Even though your name is on the Title of the home, the lender puts a lien on the Title to ensure that they will get paid back on the loan.
  • The lender requires that you stay in the home for at least five years so they can make a profit on the interest of the loan.
  • A person on Medicaid can lose their benefits if they withdraw more money in a month than the Medicaid limits.
  • Make sure that your spouse is on the Title to avoid the surviving spouse from being responsible for paying back the loan while still living in the house.
  • If your house sells for less than what is owed, your heirs won't receive any money.

For Example: What if in ten years the housing market is in the tank and the loan is now up to $180,000 from all the interest and fees added, but you home won't sell for more than $125,000. The lender looses money and you don't make a dime from the sale. Even if the housing market was good and you got $200,000 for your house, you would only make a $20,000 profit. Another Note: You cannot sell your house for less than it was appraised for, so you cannot negotiate a lower price for the buyer of your home.

Final Thoughts

A reverse mortgage may be a good option for people on a limited income to help with monthly bills and the upkeep of their home, or to avoid foreclosure. But, it is wise to seek legal and financial counseling before you consider getting one.

Comments

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    • Charity Squid profile imageAUTHOR

      Charity Squid 

      6 years ago

      I'm glad you found this article useful and made you aware of the downside of a reverse mortgage.

    • duffsmom profile image

      P. Thorpe Christiansen 

      6 years ago from Pacific Northwest, USA

      Very helpful article. We have thought about this for the near future, but there is more to it then I thought. Thanks for a very informative and helpful article.

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