The risks of reverse mortgages often outweigh their benefits. There are better financing options for older homeowners.

You’ve probably seen or heard commercials that claim a reverse mortgage can solve  financial problems for older homeowners. Paying off an existing mortgage or supplementing retirement income are alluring prospects for many folks with cash flow problems. However, there are significant drawbacks to reverse mortgages. Here’s a quick overview of how reverse mortgages work, their risks and alternatives.

What is a reverse mortgage?

A reverse mortgage is a type of loan offered to homeowners 62 and older. A lender offers cash based on the homeowner’s equity. The cash is made available as a line of credit or a monthly payment, sometimes both. The borrower/homeowner continues to be responsible for property taxes, homeowners insurance and maintenance.

A reverse mortgage gets repaid when the house is sold or one of the following things happen:

• The homeowner moves out
• Property taxes are in delinquency (not paid)
• Homeowners insurance lapses
• The home falls into disrepair
• The homeowner dies

When one of the events above occurs, the house is sold. The lender gets repaid and any excess proceeds from the sale are distributed to the owner or their heirs.

Plus—this is a biggie—at the time of repayment the lender will collect interest on the amount borrowed. No matter what, the balance to be repaid will grow over time, cutting even further into your equity. You or your heirs will owe more than what was borrowed due to interest charges.

The downsides of a reverse mortgage

A reverse mortgage poses a higher risk of foreclosure than a traditional mortgage because of the many events that can force a sale. For example, if maintenance isn’t up to the reverse mortgage lender’s standards and they declare that the home is in disrepair, you could be required to sell and move.

Unless there is a “non-recourse” clause (stating the borrower can’t owe more than the value of the home) what’s owed at repayment time could be greater than the home’s selling price. If this happens, you or your heirs will face debt.

Another downside is that a reverse mortgage can eat away at precious home equity with hefty fees that need to be paid up front. Reverse mortgages can be a costly way to tap into home equity.

Additionally, a reverse mortgage limits your options in the future. Many folks who plan to stay in their homes end up needing to move closer to family or need an assisted living facility. If you decide to move after getting a reverse mortgage and you’ve drawn against all your equity, you could be short of funds for your next home.

Alternatives to a reverse mortgage

After considering the disadvantages and risks of reverse mortgages, many homeowners opt for one of the following financial moves instead:

• Refinance the existing mortgage—a longer term or lower interest rate can lower monthly payments
• Get a home equity loan or line of credit (HELOC)—this option allows homeowners to tap into home equity without high fees
• Sell the home in order to downsize—a smaller home often means less maintenance and lower property taxes
• Have their kids buy the house and lease it from them
• Sell other assets, such as stocks, bonds or property
• Rent out part of the home for monthly income
• Get a personal loan

At Consumers, we offer several options for HELOCs and refinancing your mortgage. Talk to one of our Mortgage Loan Officers to explore your alternatives to a reverse mortgage.

 

All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications, and collateral conditions.