Is a Reverse Mortgage a Ripoff?
Reverse mortgages are loans designed to give older homeowners access to their home equity for retirement purposes, using it as an income stream when moving out or passing away. When this loan matures and must be repaid by selling or refinancing it.
Reverse mortgages offer some potential advantages, yet also come with several drawbacks that should be taken into consideration. Though not a scam per se, reverse mortgages might not be appropriate for everyone.
Key Takeaways
Reverse mortgages provide older homeowners with a source of income derived from the equity in their home. Lenders take ownership of it once the homeowner moves out or dies and use that equity as payment toward any outstanding balances on loans they owe – the exact amount you will get depends on age, home equity value and market interest rates.
Due to scammers in the reverse mortgage industry, it’s vital that you perform adequate due diligence.
Considerations of Reverse Mortgage for Remain in Home. Pros. To be eligible for a reverse mortgage you must continue living in your current residence while applying for it.
Transform home equity into an income source or source of savings
Your risk may be limited in certain instances.
Cons: Reverse mortgages come at a cost, so weighing the benefits against their associated expenses should be done carefully before opting for one.
Home Value May Depreciate Over Time
Home ownership comes with some limitations that restrict what can be done with it.
Pros Explained
Reverse Mortgages Enable You to Stay Put in Your Home
By selling your house to get equity out, selling often means having to move out or renting from its new owners; with reverse mortgages you can stay where you belong if that’s your plan.
Reverse Mortgage: No Monthly Payments: Reverse mortgages require no monthly payments – instead, repayment is only made when leaving your home.
Turn your home equity into cash: With a reverse mortgage, you can turn your equity into an ongoing source of income that you can use for other expenses.
Reverse mortgage proceeds are tax-free: Because reverse mortgage proceeds are considered loans, any money earned through them doesn’t incur taxes upon receipt.
Your risk may be limited: With an FHA-insured reverse mortgage loan, your risk can be minimized at the end of your loan agreement if your home’s value does not cover off its remaining balance and your lender takes possession of it without being able to cover its outstanding balance with it. At that point, the government will cover any shortfall.
Reverse Mortgage Cons outlined: It’s easy to forget that reverse mortgages are loans; therefore interest will accumulate over time. In addition, lender fees such as origination fees must also be paid.
Reverse mortgages won’t help you maximize the value of your home: Reverse mortgages don’t typically provide as much value than selling, due to ongoing fees and interest.
Restrictions on what can be done with your home: With a reverse mortgage loan, it only lasts as long as you keep living there. If you decide to relocate, spend significant amounts of time elsewhere, or enter a nursing home/care facility, selling could become necessary in order to pay back the debt owed.
Risk of foreclosure: By agreeing to take out a reverse mortgage loan, you commit yourself to keeping the home in good condition and paying all associated costs like property tax and insurance premiums as stipulated by your agreement with your lender. If you don’t keep up your side of the bargain, they could foreclose on you and seize ownership.
Spotting Reverse Mortgage Scams
Reverse mortgages are designed for older homeowners; in fact, in order to qualify for an FHA-insured reverse mortgage at least age 62 must exist.
Unfortunately, reverse mortgage scammers looking to take advantage of seniors are all too common and it is essential that seniors protect themselves against such scams.
Some scams are easily identifiable. Anyone using high-pressure sales tactics or trying to convince you to sign documents without first reading and consulting an attorney are likely scammers that you should avoid.
However, some scammers are less obvious.
Note that fraudulent agents may try to obtain your identity and apply for a reverse mortgage without your knowledge or consent. Contractors might recommend the loan as the best solution to fund home repairs only to send you towards untrustworthy lenders.
As part of your research and due diligence process, it’s crucial that you review documents thoroughly and select an ethical lender.
Should You Consider Getting a Reverse Mortgage?
Reverse mortgages may be beneficial to certain homeowners; however, they’re not suitable for everyone.
Reverse Mortgages Can Make Sense
Reverse mortgages may be suitable options for certain homeowners.
Alternatively, if you plan on staying put and do not plan to relocate or spend significant amounts of time in another home in the near future, a reverse mortgage could be an ideal way to extract cash from your existing residence.
If funds are tight and payments on something like a home equity loan become unmanageable or you need extra income for essentials, obtaining another source of funding could help provide extra financial security.
Reverse mortgages may also be a suitable choice for individuals with poor credit who find other forms of loans harder to qualify for due to higher requirements for eligibility.
Reverse Mortgages May Not Make Sense Reverse mortgages may not always make financial sense for some people.
One situation where it might not be wise is if you own multiple homes and spend your time between them. A reverse mortgage can only be obtained on your primary residence; if it becomes difficult to identify which of your properties is your primary one, foreclosure could occur.
Note
If your estate will pass to heirs after your death, reverse mortgages should also be avoided as a possible method for doing so. While they have the option of repaying their loan and keeping the house, this process can become complex, so it may be more convenient if no reverse mortgage exists in the first place.
Reverse mortgages should also be avoided if anyone other than your spouse lives with you, since qualifying spouses have the ability to stay in the home after you move out or pass away while other family members and roommates don’t receive that protection unless they’re co-borrowers of the loan.
Alternatives to Reverse Mortgages
If a reverse mortgage isn’t right for you, there may still be other methods available to unlock equity from your home.
Home Equity Loan
A home equity loan utilizes the equity you’ve accrued as security for a loan, giving you one-time, lump-sum payments you can use for almost any purpose – making these loans ideal for people with one-off expenses who don’t require ongoing income streams.
Home Equity Line of Credit
A Home Equity Line of Credit, or HELOC, allows you to draw down funds when needed from the equity in your home – up to an agreed limit – without incurring fees for doing so like credit cards do. Rather, payments and interest will simply accrue on any amount borrowed like with any loan agreement.
HELOCs can be particularly helpful to homeowners who may require multiple cash infusions, allowing them to avoid having to apply for loans each time they require funds.
Many older homeowners can successfully downsize their homes. For instance, if originally needed a larger house to house your children but they have since grown and left home, now might be an opportune time to relocate into something smaller.
If you sell and buy a more affordable home, any extra proceeds from selling could cover expenses more easily.
F.A.Qs) How Can You Break Free Of Reverse Mortgages
Are You Wondering If It Is Worth it for Me To Repay My Reverse Mortgage Now
Want More Content Like This? Want To Join the Discussion and Get Updates From The Balance Each Day About Reverse Mortgages And Financial Matters? Sign Up For Their Daily Email Update for News, Analysis, & Financial Tips – Directed Straight To Your Inbox Every Morning
